The Betterment Experiment – Results

In October 2014, I took my first plunge into automated stock investing, choosing Betterment out of a large and growing field of companies (affectionately referred to as Robo Advisers) that offer similar services.

On this page, I’ll keep you up to date with quarterly results, and we’ll also learn more about how Betterment works, and investing in general.

Show Me The Money!

(results as of September 30, 2018)

The orange line in this handy graph shows the results of my real investment at Betterment. I started with $100,000*, and am allowing them to suck in and auto-invest another $1000 from my bank account every month as well as reinvest all dividends, to simulate a pretty typical scenario.

The blue line is what would have happened if I had followed the same investment pattern with entirely US stocks through Vanguard’s excellent VTI Exchange-traded fund, and the red line is the same scenario if I had bought Vanguard’s “Everything Except the US” fund, which goes by the ticker symbol VXUS.

The Portfolio Analyzer tool above is not yet giving me results for October 2018 yet, but Betterment also gives me a nice interface (see below) into exactly what my money has been up to since I started this account.

This should help put the recent market decline into perspective, which has generated a lot of scary headlines in the financial papers involving the words “plunge” and “worst ever”. They make money off of scaring you, there is nothing scary at all about a buy-and-hold index fund investment.

Why do I recommend this?

In one word: Simplicity. OK, maybe we could add a second word to that: Efficiency.

After seven years of writing this blog and hearing from readers of all types, I find that the same question keeps coming up: “What is the single step I can do to get started in investing?”

With no knowledge at all, most people default to keeping their money in a savings account where it will earn them nothing. Others resort to a Wild West financial adviser whose claims and fees exceed his actual financial knowledge. Or speculate in individual stocks and try to time the market. None of these approaches are winners over the long run.

To combat this, I’ve always said “Just buy the Vanguard Total Market Index fund (ticker symbol VTI).” That gives you a near-optimal ownership of hundreds of companies, in single giant, stable, low-fee fund run by an honest company. Over time, this single investment will outperform over 90% of financial advisers and other funds, while letting you sleep well at night.

To improve on VTI, you need to soak up a few more books about investing, general world finance, and asset allocation. And while this has always been my idea of a good time, I have learned that many people have other ideas for their weekends. And even those of us who read these investing books (myself included) often fail to execute the principles properly and consistently.

Betterment combines the (slight) advantages of more advanced investing, with an even simpler experience than you would get with just buying shares of VTI. The worthwhile things they provide, in my opinion, are:

really good tools to show you things like, “how much tax would I owe if I sold these shares right now?”, “how much income would my portfolio generate if I retired right now?”, and other useful visualizations

a very sleek charitable giving system, which makes it easy to donate some of your appreciated shares – giving you a much bigger tax advantage than simply giving cash. More details on this in my 2017 charitable giving article.

In exchange, they charge a fee that is quite a bit lower than the advantage they deliver (and at least 75% less than most financial advisers), so in my view it is a win/win way to invest.

Short-term fluctuations (under 10 years) mean almost nothing.When investing for lifetime wealth, you need to think about longer time periods than you’re used to. It doesn’t matter what your stock does right after you buy it. What matters is the average price as you sell it off in increments much later in life – which could be 20-80 years from now.For example: Imagine that I went back in time to October 14th, but instead of getting started with Betterment, I bought $100,000 of stock in the video game company Electronic Arts (EA). As luck would have it, those shares would have closed out 2014 worth about $143,000. Does that mean EA is a better investment than VTI? No, it’s just more volatile. In fact, if you had bought EA in 2003 and walked away until December 2015, you would have earned zero returns for the entire twelve year period. The company has never even paid a dividend. Individual stocks are a sucker’s bet.

Your fancy new Betterment account contains more than just US stocks – this is a good thing!The Vanguard fund VTI tracks the majority of US stocks. A Betterment porfolio tracks the majority of the developed world’s stocks. From 2014 to 2018, US stocks happened to be on a rampage, while European companies have seen solid earnings but lower stock price multiples. In other words, European stocks have been on sale. So my Betterment portfolio didn’t rise as quickly as the US market. At other times, the reverse happens: US stocks will fall dramatically, while other markets will fall less or even rise. On top of this, international stocks currently pay a much higher dividend yield. For every $100,000 of VTI you own, you’ll get $1780 in annual dividends. For an equal amount of VXUS, you will get $3370, or almost twice as much. In other words, international stocks are priced at a much more attractive level than US stocks, which in my book is a time to buy.

How about that Tax Loss Harvesting?

One of the features of Betterment is that their computers spend all day looking at the stock market while you are off doing other things. Occasionally, this leads to an opportunity to profit from volatility in the market. Selling some of your stuff to lock in a tax-deductible loss, while buying the same stuff through other funds so you remain fully invested.

As of early 2016, I am coming to realize that this feature works much better than I had expected. Take a look at this recent snapshot from my account :

Betterment has harvested $23,300 in deductible “losses” on an account with about $275k of taxable money in it (I have some of my other personal savings in Betterment besides the $116k I have put into the official betterment account, and I can’t separate the reporting).

The value of this is significant: a $23k deduction saves me over $7,000 in income taxes right now, which I can use to buy still more investments. If this $7,000 goes on to earn a conservative 7% ($490/year), it is already out-earning fees Betterment charges me (0.15% of $275,000 is only $412 per year). Forever. And that’s just the passive income from the first 16 months of tax loss harvesting!

In other words, in my opinion Betterment costs less than nothing to use due to TLH alone, even before you factor in the benefits of the automatic reallocation, better interface, or other features.

The bottom line is that you save on taxes today but end up with investments which have a lower cost basis. This means you’ll have more taxable gains when you eventually sell them But for many of us, this is years down the road in retirement when we have ditched the full-time salary and thus are in a lower tax bracket.

How this works in practice: So when I file taxes for 2015, I can subtract the $14,682 in short-term capital losses from other gains (such as the rental house I sold this year), or up to $3000 against ordinary income. Betterment sends you a tax statement that you simply plug into your IRS tax forms, Turbo Tax, or hand to your accountant.

But this is not useful for everyone. For example:

If you are using Betterment for an IRA rather than a taxable account, there is no such thing as Tax Loss Harvesting.

If you are in a low income tax bracket right now, you might not have enough potential tax savings to make it worthwhile

If your income ends up rising even after retirement (as has happened to me and many other early retirees), TLH might be counterproductive if you end up selling these shares into an even higher income stream in the future.

If you have other investments outside of Betterment with similar or identical funds, you might find the IRS disallows Betterment’s harvested losses. I am in this boat, so I need to manually watch for “wash sales” and slightly decrease the deduction I take.

Even with the caveats above, it is a cool enough feature (and profitable for many) that I have enabled it so I’ll be able to report the results on this page.

This experiment is just getting started, so I look forward to years of profits and analysis to come!

Note: To be clear on the background, I did not get paid to write this or any other post, but Betterment does advertise on this site. See the affiliates policy if you’re curious how I handle blog income.

* I chose an allocation of 90% stocks, 10% bonds, which you do by moving a simple slider control on the Betterment website as you set up your account.

Useful Resources:

The price and dividend payment history of VXUS and VTI, which I used to generate the spreadsheet to make the graph above:

Betterment seems like an excellent way to ease into investing. Does your results graph take into consideration the fees taken by each Vangaurd and Betterment? Betterment’s are higher than Vanguard but still very reasonable. Looking forward to seeing this drama unfold!

” For every $100,000 of VTI you own, you’ll get $1780 in annual dividends. For an equal amount of VXUS, you will get $3370, or almost twice as much. ”

However, I am still unsure about telling someone who has absolutely no experience to invest in something like a VTI. It’s not a bad choice, but the only concern is that absolutely new investors can get scared way even from a small amount of volatility. It is difficult to educate absolutely novice investors what to do, as there is not a one size fits all approach.

I’m a brand new investor ready to drop my first small amount of money, debating Vanguard and Betterment. My problem isn’t the ability to ride volatility.. I’m super okay with that. Like, I have no problem seeing the 40 year trends of what’s been happening with stock markets, and over time, see a surplus. My scares come from not knowing how to manage these Vanguard funds. Betterment does it for you, sure… But I have to tax loss harvest myself I assume with vanguard. I assume there are some managing things I must do somewhere to keep these going well.. Everyone says you gotta read up on how, and no information I read seems to say exactly how, so I’m stuck worried that I’ll throw money at Vanguard and not know what I’m doing to keep it going afterwards.. Ideally, I’d like to throw money at both, but I can only choose one for right now to start investing in.. I’m not scared of letting stocks ride for the long haul or scared of throwing more money into it month to month, but I am scared of what to do year-to-year with stocks that I already own while they’re doing their thing. I have no clue how to let those dividends mature and care for them.

Way late to this but check out Robinhood. They’re a fee-free investing platform and make it pretty easy. I have their app. I have money in it to play with, but haven’t committed it to anything yet. I checked, and they have VTI and VXUS listed. I don’t know what it’s like filing taxes with them, like I said I haven’t used them yet.

Dear MMM,
I have been pouring over the calculations, and probably spending more time than I should, but I want to make sure I am partnering with the best investment service, since I plan on setting up this thing once, and not messing with it too much in the future. A lazy portfolio approach, if you will.
I don’t doubt that the Tax Loss Harvesting option is a nice feature that can produce measurable savings. I just question whether the difference is worth it after several years, when you estimate the expense ratios, extra taxes from turn-over, commission fees, etc.

Please take a look at these 3 portfolios. I compared the current Aggressive mixes from Betterment, Wealthfront, and a single mutual fund from Vanguard (my personal rock star, VTSAX)

As you can see, the single Vanguard fund blows the other two out of the water after only a few years, no contest. Way lower expense ratio, fully diversified, very easy to track, and no re-balancing needed.

One thing I like about Vanguard very much, is that you can have all your accounts managed within a single interface, with a highly reputable company, where you can setup a spending account with ATM withdraws, where all the dividends and proceeds can be automatically swept according to your own schedule. Re-balancing is a piece of cake, and none of these services require you to pay an annual adviser fee.
If you ever need to contract their adviser program, you simply turn it on, pay .30 basis points, and you get the same level of service, or higher, than the other guys. When you want to turn the adviser part off, you simply turn it off. To turn off the adviser service with Betterment or Wealthfront, you would have to move your money somewhere else.
The only draw back I see is that Vanguard does not currently offer Tax Loss Harvesting, but I suppose a person could do a hybrid approach, sending $100k or so to a Wealthfront taxable account, to get their superior Direct Indexing service, and leave all the tax-advantaged money with Vanguard. At least that is the way I am leaning.

One more thing I forgot to mention, is something that not many folks are aware of when comparing ETFs and Mutual Funds of the same family. Even though both may be from the same company, have the same expense ratio, and track the same exact index, the big difference over time is the bid/ask spread on ETFs. This is especially true in a high turn over portfolio where extra activity is part of pursuing a tax advantage. Those spreads can add up to very significant differences over time.

Hey Jorge – first of all, portfoliovisualizer looks like a GREAT tool, thanks for sharing it!

Secondly, in the link you gave, the analysis period gets truncated from 2008 to present, which I’m sure you would agree is not a good representation of average market performance. The problem seems to be some of the funds are more recently created.

If you can substitute some longer-lived equivalents and have the backtesting go from, say 1974 to present it might be a better test. But backtesting is a tricky game to play no matter what: you can always find a range of dates to prove almost any hypothesis.

I personally just happen to believe the Betterment asset mix is a preferable one to just US equities. But I could be wrong: if we end up with better governments than Europe over the long term, it’s possible we’d continue to dominate for a long time.

Yeah, I noticed also that it truncated from 2008. That is because of one or more of the underlying ETFs was not in existence back then, so it chops the entire portfolio at that point.

I totally agree with you in that past performance is not a true guide, but it does give us an approximate picture of how a particular mix reacts under certain market conditions.

As far as the robo-advisers, or any other type of adviser for that matter, maybe it is my extra frugal nature that tells me there must be a better way to get automation without dishing out so much cash.

When I do the math on an extra annual expense of .25 for the service, on top of the more expensive ratios for regular Investor-class ETFs, compared to the Admiral shares I have in my mix, that is a pretty substantial amount of cash going out the door every year. I mean, we are talking about an extra .35 to .50 on the average, and that doesn’t even include the extra drag produced by the bid/ask spreads.

Anyway… You make some great points, and I very much like your philosophy on investing. I want you to know that you have been a huge inspiration for me, ever since I found your web site just a few months ago. I had not explored the possibility that I could actually pull the plug earlier than the establishment dictates, but after running the numbers, I think I can, I know I can, I’m sure I can. :-)
Thanks so much for being a voice of reason out there MMM.

Jorge, Portfolio Visualizer is cool. Thanks for sharing. Just a word of warning to users following this thread, the link that shows up in the emailed post doesn’t work correctly. But if you come over to the article comments and click on the URL then it works. (All the ampersands were escaped to & which messes up the URL)

Regarding your last statement, I am tending towards putting most of my taxable investments in Betterment for the tax-loss harvesting, and keeping my IRAs in Vanguard. This seems like a good approach. Also, Betterment has some pretty nice tools for helping with drawdown on a portfolio which are nice once you hit retirement.

Moneycle,
Thanks for the heads-up, and sorry I didn’t anticipate the encoding messing up the link.

I personally think that stashing part of a person’s taxable assets with Betterment, Wealthfront, or a similar service, is a good plan. I’m contemplating adding $100k to a taxable account with Wealthfront to see how their Direct Indexing performs. They manage the first $15k for free, so I only pay .25 on the remaining $85k ($212), and that qualifies me for the Direct Indexing service, which they claim it is way better than indexing on whole ETFs. We’ll see.

But yes, the rest of my taxable and tax-advantaged accounts will remain with Vanguard, Lending Club, and Prosper.

BTW, for retirement funds with Vanguard, check out VWIAX. A real beauty in terms of the reward to risk ratio, even though it only has less than 40% stocks in the mix. Pretty impressive returns given the stability and low risk.
Cheers!

Does anyone here have experience with Wealthfront’s direct indexing and how much it saves on fees? I’m trying to decide whether to open a $100K taxable account at Betterment or Wealthfront. Betterment has lower fees (.15 x .25) but doesn’t offer direct indexing. Wondering if direct indexing will make up for, or exceed, the .10 extra I’d pay if I went with Wealthfront. This is an account I’d contribute to every month.

Moneycle, I see your comment was in April. How’s it going for you? Just found MMM and am intrigued. Most of my investments to date have been in IRA’s, but now moving savings and a cash account ready to invest. Is this what you did with Betterment? TIA.

Does the .15% fee Betterment charges (or .25, or whatever, depending on investment amount) include the fees Vanguard charges them for the actual funds you invest in? Or is the total fee .15/.25 to Betterment +Vanguard-expense-ratio?

I started using Betterment after reading your post about it. I think it would be helpful to point out (or maybe I missed it) that the lowest fee level requires you to have at least $100,000 in your account. Another threshold requires at least $10,000 or auto-depositing at least $100 each month. If you don’t meet any of this criteria, the fee is higher. I don’t recall the numbers off the top of my head or if the highest fee is lower than the competitions though.

Thanks Brian, I added a link to their fee structure in this article. It’s roughly like this:
0.35% for balances under $10k (so the fee maxes out at $3/month for $9999 balance)
0.25% for $10k-$99,999 (maximum fee would be about $21/month for $99,999)

Then the fee drops to $13/month for a $100k balance, and scales up with balance from there.

Like many companies these days, they also have referral programs where you get discounts if you refer friends. I’m not using any for my account, just because I want to keep the results undistorted for this experiment.

If you’re somewhat realistic in considering betterment, a $100 a month auto deposit is a very smart way to go. Lowest fees available, with a very small amount of money required. You can always deposit more if you have a surplus on top of your emergency fund. :)

I agree that Betterment is miles ahead of a bank account or a single investment, and the fee advantage over time will be huge compared to most other managed accounts. It is surprisingly low in badassity, however. For those planning to live off their savings for the rest of their life, these are substandard returns, and doing better is the most important investment you can make over the long haul.. A dedicated independent investor with time and motivation CAN do much better on their own. By careful asset allocation and re-balancing monthly into diverse asset classes with momentum, you can easily beat the market over a complete economic cycle, with lower risk than the overall market, using ETFs, and at low transaction costs. You have have discipline and be willing to experience returns that go against the market at times, but it pays off in the long run. For those interested in doing their own research, I recommend papers/books by Meb Faber and Wesley R. Gray.

Peter, there are VERY few people who can consistently beat the market. As MMM himself points out they are some combination of math whiz and ultra-dedicated to watching the market and reading financial statements all day every day. For those VERY few people, your advice probably holds. For everyone else (99.99% of the population) MMM’s recommendation of indexing/robo-advisor is better.

I’m late to the party here, but I agree with Chris wholeheartedly. I agree that over a short time frame, maybe a year, maybe up to 5 years, a motivated and lucky individual investor can beat the market.

But over 30 years? The very best investment you could have made 30 years ago was to buy an S&P 500 index fund and dollar cost average in ever since. Even taking into account the several recessions since then, you’d have come out ahead like gangbusters.

Read DALBAR’s most-recent Quantitative Analysis of Investor Behavior. IIRC, the market made approx. 11% returns over the last 30 years. The average individual made 1.85%, which is a full percentage point less than inflation over the same time period!!

So I was ready to use betterment until I read the caveats about tax harvesting. I make 36k a year (pay my own health insurance on the marketplace)… Currently have 5k in a few stocks, and I have around 5k in a savings account. Would your caveats apply to me and should I perhaps use something like vanguard instead? Thank you!

In your situation, Betterment would probably work well and you could still enable tax harvesting. It wouldn’t save you a huge amount every year, but still would probably pay for the Betterment account itself. Even with harvesting disabled, it is still a worthwhile service.

Edit: As of April 2015 Betterment provides the Tax Loss Harvesting service free on all accounts. Paloma would be in their 0.25% fee bracket ($25/year on a $10k account), but Dodge’s other points still apply below.

Even if Paloma had the $50,000 required in Betterment to get access to their Tax Loss Harvesting feature, her low tax bracket almost guarantees that the 0.51% ER (yearly fee) on her portfolio will overcome any benefit gained the first year. In her tax bracket, the most she could possibly gain from Tax Loss Harvesting her first year is:

Even worse, after the first year or two, that same $50,000 deposit will likely never receive Tax Loss Harvesting again, as there will simply be no losses to harvest. This has been the case for every single year that the ETFs in Betterment’s portfolio have been around. When you think about it, if you’re investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest). After a few years, the cost from the higher fee will negate the early benefit from TLH, and it’s all downhill from there.

Said another way, why recommend Paloma pay a higher *percentage fee* on her portfolio, each and every year, for the rest of her life…to save forty-five bucks the first year?

Is it correct to say that tax harvesting doesn’t apply to an IRA? True, you aren’t paying taxes yearly, but aren’t you going to have to pay taxes on the gains as you take distributions out of the IRA, and won’t those gains be lowered if a tax harvesting strategy has been applied to the investments?

I’m not an expert in this, but from my reading of the tax books it looks like, Yes, tax-harvesting basically doesn’t matter in an IRA. Whether you keep it all in a CD earning a straight interest that you never ever sell, or day trade with options, in the end it only matters if the IRA is of the traditional or ROTH variety.

If it is traditional, you are taxed on ALL money withdrawn after you are 65. That’s ALL money, doesn’t matter if you tripled your investment or lost half. (Remember, you dodged taxes on the income contributed going in.) You also have required minimum distributions (RMD) once you are 70.5 years old. (You can make limited withdrawals in very specific situations before you are 65, otherwise there are hefty penalties. These, again, are independent of gains or losses.

If it is a ROTH, you are NOT taxed on all money withdrawn after you are 65. That’s NO taxes, again doesn’t matter if you tripled your investment or lost half. (You paid taxes going in.) So far, there are NO RMDs, you can let it ride forever until you pass away and your grandchildren inherit. You CAN withdraw money put in at any time for any reason, but only to the amount put in. (For example, you contribute $5500 this year. It makes 10% by Dec, to a balance of $6550…. when you need cash for some emergency! You can withdraw the $5500 back out, but must leave the $550 earnings in until age 65.)

Doesn’t matter when you sell, or “harvest losses”. Just make sure you make money!

Hello, I have been following your block and reading some of your posts, thank you so much. It all has been really useful to me. This is the first time ever that I comment a blog, so I hope it works, I live in Australia and would like to know if there is a similar company to Betterment here or can I still invest with them? sorry about the ignorance, I am just starting to learn and have bought my first book “The four pillars of investment”. I am thinking to invest 10.000 Australian dollars. Thank you so much..

To paloma
I think you should max out any 401 k 0r 403 b and then invest in vanguard IRA..[ you don’t have benefit of TLH for IRA] The ER for those accounts [401] may be heigh but you are being benefit of tax savings. then if you have extra money invest with betterment in taxable accounts and move that money to vanguard after 2 to 3 years [ after getting benefit of TLH].
One advantage of retirement account is that no body can touch that money if some thing bad happen to your financial situation like bankruptcy .

While 401k accounts are protected by federal law from being taken in a bankruptcy, the ultimate answer depends on your state of residence – some states (like CO where I live) IRAs are also protected from creditors in bankruptcy.

Better double check this. I believe under federal law, both ERISA and non-ERISA retirement plans are not part of the bankruptcy estate, up to about 1.2M. This includes 401ks and IRAs. Under this federal law, states are not allowed to opt out. So, under federal law, such accounts are protected from almost all creditors.

Can someone explain to me how MMM calculated that amount of money you would receive in dividends annually if you owned $100,000 of the two Vanguard funds VTI and VXUS? I was looking at the numbers on Vanguard’s site and don’t know how to crunch the numbers…

From what I understand, it’s not a difficult thing to calculate, but I can’t figure out how to get the numbers that he is getting.

Hey MMM- great info here, Betterment seems like an awesome place to ‘stash funds after maxing out tax advantaged accounts.

Question for you, have you ever written an article about purchasing stock options from an employer? My employer offers an option where we can buy stock for 15% off the lower of the price at the beginning of a given quarter and the end of the quarter. Some friends I know working at other companies have similar setups.

Where does an option like this fit in to the investing continuum? Obviously you are putting your eggs into one basket to a large extent, but 15%+ returns off the top are pretty appealing.

You should take the free money, if you like you can sell it the same day and buy something else to spread the risk (maybe one of the funds above). A 15% profit in 3 months seems hard to beat for any fund.

Talked to a CPA this year about ESPP. She said taxes are paid when the stock comes to you. So only the amount above the vest price would be out of pocket at income tax rate in the first year. ie. Cashing out right away means you’d only pay a sliver of income tax on the earnings after vesting.

I’d agree with Alex above: I did participate up to the maximum in Cisco’s employee stock purchase plan for all 5 years of my work there, because the odds were strongly in our favor: 15% discount, and your purchase price is the lower of the start or end price of each 6-month rollover period.

But then I generally sold my stock options and employee stock purchase plan shares as soon as they were available to sell. After all, if you wouldn’t BUY your company’s shares with your own money, should you keep them once they are handed to you?

There was one exception where Cisco shares went down to $7 when the P/E ratio suggested they were worth $20 – in that situation I held on for a year or less and sold them at $20. A few good profits there, but the program was limited to 10% of your salary.

I have been really curious about this topic as well! Hubby and I work at the same place and currently he puts 10% while I do 20% to the espp. We do have to hold for a minimum of 1 year. My hesitation with selling shares as we are able to is that we’re currently each making > 100000 so I’m thinking the tax hit we’d take from the gains will impact is more now than they will later when we are FIRE and our income is lower. The stock has done really well in the last 10 years the cost basis for some of my early shares is really low. Am I correct in my thinking about the tax implications?

Nortel, Enron, etc. were also “doing well”, before they were not. Please don’t put too many eggs in one basket. Especially when that basket is also your employer, and especially when that basket is also your spouse’s employer.

Nostache – Just keep buying regularly. You’ll be dollar-cost-averaging in at different value points this way. Time in the Market is far more important than timing the market.

And you should almost never base investment purchase/sale decisions on what happened over a 3 month span. That said, if you’re putting in large lump-sums, it isn’t a bad idea to take a look at the P/E for the S&P or broader market to see how the overall valuation looks compared to historical.

If you are concerned by today’s market drop, then No! VTI is a fine fund. Low fees, etc. Just buy and hold. Some days it will drop, like today, and other days it will jump up. Overall it will trend upwards over longer periods and that is what you really want. If you sell your VTI now, you will lock in your losses. That is a rookie move.

I love Betterment. I’ve read almost all their blog posts explaining their thought process behind how they weight portfolios, their dividend reinvestment/rebalancing automation, etc. it just makes a lot of sense to me.

There’s a fair amount of Betterment bashing on the forums, so it’s nice to have the creator of the forums in the corner of Betterment. Not to say that investing in a Vanguard index fund isn’t great, it clearly is, but I believe, like you stated, that Betterment offers more than enough to compensate for their very low added fee rate.

Robo advisers…lmaof!!!, that’s a good definition.
Thanks for the update on your Betterment financial experiment. I think is very helpful to see how it works with real life investing. Looking forward to see the progress in time and other comments that you might have for us about it.

I max out my TSP and a Roth IRA. If I want to open up a Betterment account in order to put my previous ’emergency fund’ into, will Tax Loss Harvesting be applicable to me? Or would I be almost be better off using my 2015 contribution for tax free growth in the Roth IRA? I have about $8K line of springy credit for the emergencies and still would have a few thousand in cash. Government job, very secure as a technical professional luckily. 25 and on my way to financial freedom! All tips are appreciated.

I have both Betterment (90% stocks, 10% bonds) and VTSAX (like VTI, but a mutual fund not ETF). In a 90/10 Betterment portfolio, almost 40% is invested in VEA, which has not been doing well, but of course could rise in the future. What is your Betterment stock/bond ratio? Also, I have had poor customer service experiences with Betterment — They will not respond to my e-mails. When I complained over the phone, I basically got a shrug and was told that everyone else thinks they provide excellent customer service.

Tricia from Betterment here. I’m sorry to hear that you’ve had a negative experience with us. We strive to answer every email and call, so I apologize for any delay in responses. I will pass your feedback to our customer experience team.Please don’t hesitate to contact us again, if you have any questions or concerns.

One disadvantage of using Betterment for IRA’s is the method of paying their management fee which is taken from your retirement account. It is better to pay this fee from outside your retirement account allowing you to maximize it’s size.

Thank you for this article and the follow up. I am sure some people in this forum will relate to my situation.
I have a $120K invested (taxable account) in a dozen funds with my financial advisor that I want to take control (no more ridiculous fees). The actual funds are a good mix. To move it to Betterment, I am forced to liquidate all funds which will hit me with $20K in capital gain taxes. The other option is to move the funds to Vanguard and avoid the advisor’s fees.
What is you take?

Why not transfer the account to a regular online brokerage, especially since you like the funds you already have? Most will cover transfer fees, or even give you money to do it. TD Ameritrade, for example, will give you $300.

“To receive the reward you’ve selected, you must open a TD Ameritrade account and fund it with a minimum of $2,000 within 90 days of your submission.” Sounds like you have that amount, no problem!

When you fill out the paperwork, just say don’t liquidate, keep all the funds you already have. Easy.

Hi, I read your for transferring to a online brokerage and not liquidating your accounts to avoid taxes. I would like to move my money from my current broker to a Vanguard index your fund. How can I do that without liquidating and having to pay tax? Thanks.

Hope you don’t mine me adding a comment. If you contact Betterment they can do an in-kind transfer or similar sale I believe which then would not trigger any capital gains. If I am not mistaken, they can also sell investments at optimal times too to minmize taxes but you need to call them for details. I wouldn’t plan my portfolio around tax avoidance though and don’t be afraid of capital gains…it means you are making money :-)

To have a $20k cap gains tax bill you would have to have $133k in profits, which obviously you don’t since you said there is $120k in the account in total. They only tax the money you gained, not the principle.

This still doesn’t make sense to me MMM. When I talk to newbies about investing, I give them two recommendations. Here are two fully-automatic funds which will take care of literally everything for you. It’s so automatic, that after you create your account, and tell Vanguard how much you want to contribute monthly from your bank account, *you never have to login again until you need the money*

It all depends on how how automatic you want it to be:

1. If you’d like to choose your own amount of risk, you can fill out the a short survey and Vanguard will recommend a level of risk for you. Simply invest in a LifeStrategy fund per their recommendation, or choose your own. These funds have a low ER (yearly fee) at 0.16% (16 hundredths of a single percentage point), and will do everything for you. 0 maintenance required.

2. If you don’t even want to choose the risk, and want a truly full-automatic account, simply tell Vanguard the year you’d like to retire, and they will handle the risk decision for you, along with everything else. These are the Target Retirement funds:

I don’t understand how you can justify an ER of 0.31% – 0.51% (Betterment’s fee on top of the fee from the investments they choose) at Betterment, by saying it’s simpler, when these same options are available directly at Vanguard (instead of paying Betterment to invest in Vanguard funds for you), for a significantly lower cost. If we follow the numbers in your example, this decision will cost your readers hundreds of thousands more in fees over their lifetime:

Dodge, you are right about those options at Vanguard and they are great.
The LifeStrategy are actually a combination of 4 “Total X Market Index” funds. The LifeStrategy Growth Fund (VASGX) has 0.17% as expense ratio. You could invest the same portfolio on your own for 0.082% (ETFs in parenthesis): 56.6% VTSAX (or VTI) with 0.05% ER; 23.3% VTIAX (VXUS) with 0.14% ER; 16.1% VBTLX (or BND) with 0.08% and VTABX (or BNDX) with 0.2% ER.
Regarding Betterment’s fees, there are no fees on top of fees. The fee you pay covers everything and ranges from 0.15% to 0.35%. If you invest $100K or more you fee is 0.15% and that’s it. You also have the TLH feature that can more than pay those fees (~0.77%). That is MMM is promoting this.
Hope this explanation helps.

Incorrect, Betterment’s fee is *on top* of the fee on the underlying funds. Betterment takes your money, and invests them in ETFs for you. These ETFs have their own Expense Ratio. It is impossible to be invested in these ETFs without paying their Expense Ratio.

The math shows that after a few years (between 1 and 3 typically), any particular deposit will pay more in fees, than it gains in Tax Loss Harvesting. If you’re investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest). On average all TLH activity stops on any particular deposit after about a year.

After a few years, the cost from the higher fee will negate the early benefit from TLH, and it’s all downhill from there. This has been the case for every single year that the ETFs in Betterment’s portfolio have been around. You can mask this, by continuing to deposit higher and higher amounts, to capture a bigger and bigger first-year benefit, but you’re really just doubling down on higher and higher fees. Sooner or later, it will catch up with you.

It is inevitable, for the simple reason that the fees are both *percentage based* (so they get higher as your account grows), and *forever* (each and every year, for the rest of your life), while the tax loss harvesting benefit is *temporary*.

You are completely right Dodge. Thank you for correcting me.
I actually called Betterment and asked them about the “fees on top of fees” and they said that was correct. I don’t see the reason (at least for me) why I want to pay an extra 0.15% on top of the Vanguard funds I will choose anyway.
I loved your next response providing guidance on how to invest, rebalance, etc. Keep it up!

Thanks for the insightful post. I’ve seen arguments made against TLH over the long term, and I feel like I’ve never seen a good counterpoint made in response. That MMM didn’t seem to address it here is perplexing to me.

If one has received a TLH for a given investment in Betterment, then maybe they can then do an in-kind transfer to VG to avoid the perpetual Betterment fee? :P

You are talking about admiral shares with low fees…. This is not applicable for those with low balance ….Most of the admiral shares need >10 000 in that fund group …you may need 100k or more to get admiral shares in all 4 categories with low ER …. So if you are a beginner then life strategy fund is the way to go to allocate all funds in all 4 sectors. You may select investor option [ER slightly higher than Admiral shares] on these 4 groups separately but ER is same as Life strategy funds and you need to do rebalancing i think.

The LifeStrategy funds have a fixed asset allocation, it’s the Target Retirement funds which glide toward bonds as you get older.

Betterment’s 90/10 portfolio contains half US Stocks, and half International Stocks, so I’m not sure what value we get from comparing it to a 100% US Stock portfolio, and a 100% International Stock portfolio. It will likely perform in the lower-middle of the lower fee 100% stock funds. A bit lower because of the 10% bonds, and the up to 4x higher fees. That’s what we’re seeing from the chart so far.

Why not compare Betterment’s automatic fund to Vanguard’s automatic fund, or heck, throw wisebanyan.com in there. WiseBanyan’s automatic fund doesn’t include any extra fees outside of the ETFs they put you in, making their automatic fund the cheapest of them all, with an average ER in 2013 of 0.11% (compared to Betterment’s 0.31% and Vanguard’s 0.16%).

Rebalancing just doesn’t seem to be that big of a deal. They recommend looking at the portfolio once a year, and rebalancing only if it deviates by 5% from your target. If it doesn’t deviate, don’t rebalance. They did the math using market returns from 1926-2009, and only had to rebalance 28 times. Most years a rebalance wasn’t necessary. They charted it out for us:

Invest any new money in exactly those same allocations, don’t even worry about rebalancing new money. You can even tell Vanguard to automatically invest the money each month for you, withdrawing it from your checking/savings account:

That’s it. No need to even login to your account anymore, unless you want to change the $2,000 auto-deposit. After one year, log in to your account. Put the numbers into the calculator, and see if the percentages are more than 5% off. If it looks like this, then great! No need to rebalance this year! Feel free to logout knowing you won’t have to sign back in for another year:

And that’s it! You’re done for the year. The fee for such a portfolio is about 0.07%, compared to 0.41% had the money been with Betterment. The difference between 0.31% and 0.07% using your numbers above ($100,000 deposit, and adding $1,000 a month) is about $568,088 extra fees after 35 years. No it’s not “one-stop” investing, but I think it’s important to see how easy rebalancing is, before paying someone a yearly percentage fee on your portfolio to do it for you.

If they can’t handle the emotions of buying/selling in the portfolio, then yes, an automatic fund can make sense. That said, it’d be great to see a non-fee company like WiseBanyan in the experiment, so we can see if the extra fees are worth it :)

How did you get that $568k figure Dodge?
100k+1k/month compounded at 7% for 35 years becomes: $2,726,500
The same thing but compounded at 6.66% becomes $2,495,860 ($230k less)

The difference is significant, but the real results over such a long period would also depend on how well the tax loss harvesting worked, and how your allocation and rebalancing strategy compared to Betterment’s.

Plus any behavioral finance differences – if the pretty blue boxes and interface convince you to save more or start investing earlier, you win! You have to remember that for most people, even seeing this conversation we’re having is enough to shut down their enthusiasm for investing for another year.

If you adjust for inflation, then yes it would be closer to $230k in 2015 dollars.

I understand the behavioral factor, which is why I point complete newbies towards setting up automatic deductions directly to a LifeStrategy fund. It’s almost like a 401k account, once it’s setup, they never have to look at it again. If the pretty blue boxes entice people to login and constantly check their accounts, that can also lead to negative behavioral factors. I read a post on your forums from someone who sold all their Betterment holdings…because (as shown in your charts above) it lagged VTI (the US market) over the last few months, and they were expecting more. This is horrible reasoning (market timing), which might have been avoided if they setup automatic investments and never looked back. Yes, I know Betterment supports automatic investments too, but like you said, pretty blue boxes!

If we really want to get serious about behavioral finance, I’d argue it’s possible the majority of people seeing this conversation, would be much better off with a 60/40 stock/bond portfolio over the long run vs 90/10. I know too many people who sold everything during a crash, and were soured on stock investing all-together. I don’t have any data on this, but it’d be interesting to see.

If your blog has taught me anything, it’s how to determine long-term value. How much is that $10 lunch REALLY worth over the long term? What about that seemingly innocent $300 car payment? I can afford it right? You taught me, that these are not the right questions:

—————————–
So when deciding whether I want an iPad 3, I don’t ask myself if it would be fun or convenient. That’s the wrong question. I ask myself, “will this thing really increase the level of my lifelong happiness?”.

Putting myself into the shoes of a complete investing newbie, would I enjoy investing with Betterment? Sure. Is it convenient? It seems so. Can I afford it? Definitely. Am I going to do it? HELL NO!!! And why would I, when WiseBanyan offers the same convenience, the same one-stop-shopping, and the same pretty blue boxes, for no extra fee? WiseBanyan’s total fee of 0.12% is cheaper than Betterment’s 0.31%, and even cheaper than Vanguard’s Lifestrategy 0.16%

You’ve shown me the long term effects of a $10 lunch, a $300 car payment, and yes, even a 0.19% yearly fee on my life savings. After seeing the math, it’s clear these decisions will not increase the level of my lifelong happiness.

I’m finally asking the right questions, and I have you to thank for that :)

First, thank you for the excellent discussions! I have learned quite a bit just by reading though this post and the corresponding comments. It’s exciting, though also a lot to take in. Hopefully I’ll build up enough understanding at some point to really invest well (and live more frugally).

Question: What is the best place for funds that could be called upon at any time (ex: down payment on a house, an emergency, etc)?

As a government worker at 29 years old, I have been contributing 6% to the TSP and work will match 4% (plus a mandatory 0.8% from me and 1% from work). My TSP is mostly in their 2040 and 2050 target date funds, which seem to be doing alright. I also max out my Roth IRA, most of which is invested in Vanguard’s 2045 and 2050 target date funds.

At this point, I have 35k to 45k that I want to move out of my savings account and into index funds. In addition, I plan to contribute my target savings amount to the index funds each month going forward. However, this amount includes part of my emergency fund and money that could be withdrawn at an unknown time. Since I live in the DC area, I do not have a car and I rent (which is high, but building up a good down payment for even a small condo here is tough, and I do not know how long I will be in the area), this money could go toward buying a home or ‘ideally’ paying cash for a decent used car at some point in the near or distant future, depending on what makes sense at the time.

Dodge’s suggested allocation for Vanguard funds above sounds right, and it looks like 42k or more would let me get into a few of the Admiral Share levels. However, I know that changes in the market or a withdrawal could bump me back down to the Investor Share level (though Vanguard will automatically move you to Admiral each quarter if you qualify).

KEY QUESTIONS:
Should I put the money into Vanguard using something like Dodge’s asset allocation and just not worry about getting bumped between Admiral and Investor Share levels (due to market changes or withdrawals, etc)?
Or should I consider using WiseBanyan or Betterment instead until I have built up enough funds to put in something like VTSAX more permanently?

Sorry that this was a bit long! I wanted to make sure that I was communicating my currently financial position and concerns accurately.

Personally, I’m all about keep-it-simple and I like that you are already using Vanguard’s Target Retirement funds. They have a good mix of domestic/international stocks/bonds that should be about 90% stocks for your target dates. I say you just put your extra money into that and forget about it. Betterment is a decent option as well as they make it easy.

Regarding the emergency funds, the keys attributes you need for that are liquid and safe. The safest place is in your bank and you can earn a little bit by buying a CD at the bank. It’s not going to earn a lot of money but that’s not what emergency funds are about. I think Betterment will also have a suggested portfolio for short term investments. You might give that a try to see if you like it.

Also, don’t buy a house if you’re not sure you’re going to stick around. There’s no shame in renting and often it is the right financial choice.

sser,
I would take advantage of the TSP to the fullest before venturing to Vanguard. Contribute up to the 17,500 a year if you have the means to. You can get close to the standard three fund portfolio inside of the TSP, with a combination of C,S,I and instead of F use the G fund.

You absolutely cannot beat the expense ratios of the TSP. No if’s ands or buts.

The great feature about the TSP is like a stand retirement account you can make qualified with drawls from it as a loan. Meaning, say you want to buy a house. You can take a loan from your own account, and pay yourself back with 4% interested. In general you should touch your retirement account. However if you can guarantee a 4% return for the duration of the loan it is better than buying most bonds. All the interest goes back into your account.

I love Vanguard, but I would only look at Vanguard after you have taken complete advantage of the TSP or you really don’t like the fund options.

I think you should max your TSP. TSP ER ratio is 0.29. But you are making your money grow 25 to 30% [Assuming your tax bracket] as soon as you invest. TSP life cycle fund is performing well and has a mix of us and international stocks/bonds. Once you Max out TSP then think about Vanguard IRA with Life strategy funds or target retirement funds. [TLH is not applicable to IRA} . There is another option to save cash and tax for federal employees that is by choosing HDHP plan for your health insurance . You can contribute up to 5500 [approximate] per year ….you are saving 25 to 30 %….That is is your emergency fund for your health….the fun part is you can also invest this money in different kinds of ETF or target date funds. It is a great option you you are young and in good health….still got extra money start IRA for your spouse and max out her 401 k and now you are almost tax free…Watch out for your open season…I have Aetna HDHP Plan

I’m basically brand new to investing period. So brand new, that I happened upon this article and your comment today and I have less than $15,000 in my bank for emergency savings. Thankfully my wife and I are 21 and 20 respectively so we have some time to work with. While I really like the idea of Vanguard investing, I just don’t have the ability and peace of mind to be able to invest $10,000 minimum in vanguard accounts. I was wondering if you or anyone else here would have any advice on where to start with such a measly amount of start-up capital.

Hi Tyler – you only need $2000 to start with Vanguard, or possibly even less if you just get a “Vanguard Brokerage” account and buy the ETF version of their index funds. Good luck and keep reading about investing!

What MMM is saying is that you don’t need the minimum for Vanguard Admiral Shares because the corresponding ETF usually has the same ER as the Admiral Share (e.g., VTSAX has the same ER as VTI (the corresponding ETF). You buy the ETF like a share and only need a Vanguard account to do so.

AKDecember 20, 2015, 2:01 pm

Dodge,

I’m a bit late to this post, but I have a question if you happen to see this. I liked your simple annual rebalancing strategy and the corresponding spreadsheet which is shown in the referenced image “http://i.imgur.com/PbI4B9x.png”, but I can’t figure out how you calculated the “Your portfolio is off by” value. And that value is the trigger to determine whether or not an investor should rebalance.

Could you explain how you calculated the “Your portfolio is off by” value?

Dodge, I’m just a bit confused about Admiral shares. Can I get in on your 56/24/20 split without investing more than $15,000.00 to start? From what I’ve read, you need $10,000.00 to get in on most Admiral shares funds – so would I need at least $10,000.00 in *each* of those three?

The Admiral class of shares does require a $10k minimum per fund. The investor shares require a $3k minimum at a slightly higher (though also very low) expense ratio. If you don’t have enough for even the investor class, you could buy the ETF that tracks the same index as the funds however you can’t convert the ETF into the fund version later. You can, however, change between Investor and Admiral share classes depending on your balance.

If you are on Vanguard’s website, simply typing the name of the fund (not the ticker) into the search bar will bring up all variants of it.

Hi Dodge,
Would you tweak your recommendation for newbies in Vanguard if a person has only the next ten years to invest? I am 60 and have to work till around 68. Have around 400K in IRA but am getting killed in fees. Thx.

I Just happened to find this from Vanguard website…..it may be very useful after you retire.

To invest now you may consider life strategy funds with low risk . The one with low risk only dropped 10% in 2008. ER around 0.15 for these . You may also choose admiral shares since you have good balance…. you have to do balancing in that case

Like Dodge, I think a better apples-to-apples comparison would be to compare Betterment to a Vanguard fund that has a 90/10 allocation. For example, target retirement funds that are more than 25 years out all have a 90/10 allocation so I would choose the Target Retirement 2060 (VTTSX) as a basis for your comparison.

MMM, can you point me to some of your articles that can explain why you choose a 90/10 allocation and do not want an allocation of even 20% in bonds? I am currently with Betterment at 70/30. I’m 62 years old but hope to not retire for several years. Thus I chose the more conservative route. Your thoughts and/or articles that might help?

I spent the past few days researching betterment vs alternative to decide if I should change my passive index approach approach. I have close to $1M in investable assets, but am semiretired so am in a low income bracket.

Based on my condition, it DOES NOT MAKE SENSE.

In fact, I wonder if it really makes sense long term for anyone.

I don’t see the point in paying the fee for a service like betterment vs investing in a low cost target date index fund. I think TLH gains are overblown, and over time, the additional .15% fee betterment charges (for over $500K invested) will grow to be a massive fee over 10-20 years.

Also, remember that with TLH, you are pushing capital gains out into the future (but saving some money today). I don’t think taxes have anywhere to go but UP. What happens in capital gains rates increase? The TLH strategy will blow up in their face. Of course, none is talking about that, definitely not betterment!

Another thing is the fees. Think .25% of even .15% (if you are lucky enough to qualify for their lowest rate) is small? Think again:

For example: $850K invested at 7% annual growth rate @ betterment .15% fee results in:
$19K in cumulative fees over 10 years
$56K in cumulative fees over 20 years
$272K in cumulative fees over 40 years
$1.6M in cumulative fees over 65 years (when I’ll be 100 years old)

When I turn 100 years old (and I plan to!), assuming initial 850K investment @7%, I’ll have a portfolio worth $70M but will have also payed $1.5M in fees! That is over 2% of my total portfolio paid in fees!

All this from just paying a small .15% over time….crazy how compounding works! The .15% fee is misleading since that is taken every year but most people won’t do the math…over time the cumulative effect is very large.

Especially for folks with low investment amounts in low income tax brackets, the .25% fee they charge is a killer. Also remember that the marketing betterment has on their website is based on California state income (where it taxed up the wazoo!). So their fancy tax loss harvesting may not yield as much gain for you.

Remember, investing is a “game of inches” and paying out a guaranteed fee for the promise of greater gain gives up those inches. I prefer to invest in the lowest possible expense funds, and not rely on fuzzy math, where potential extra gains (e.g. TLH) reply on IRS rules that are subject to change.

Betterment was so tempting since their interface is slick and it comes highly recommended from so many bloggers I follow. They also do a great job MARKETING….ahem, I mean educating…people on their blog about investing strategy.

HOWEVER, I refuse to give up a % of my hard earned lifetime of assets to a robot-investor. If they charges a flat fee, I would totally go for it…but they have NO RIGHT to claim a % of my assets each year. It’s not like they have high variable costs….it’s software doing the work, and it works just as hard for someone with $10,000K as it does for someone with $100K (in theory).

It’s ridiculous!

So I’m not getting sucked in.

Low cost indexing is where I’m sticking…for now!

One thing is for certain, the finance world is an exciting place right now…will be great to see how it evolves in the next few years.

…and thanks MMM for sharing your experience, it is only through that we can all learn and grow!

Thank you Dodge, Ravi and MMM! I am very very new at this investing game and I’m learning a lot from all the discussions in this post. This is very very helpful.

I am still confused about all this fees business and hoping to seek some guidance from you all. Below are the index funds options provided for stocks in my employer’s 401(k) program. If I go with the simple math, maximum of ( 10 year average annual return – gross expense ratio),
WFA DISCOVERY INST and TRP INST LGCAP GRTH look good to me. If I just go by the highest value in ” 10 year average annual return,” WFA DISCOVERY INST and TRP INST LGCAP GRTH look good.

Ravi, I agree with you. I am retired and have been investing about $600 per month with Betterment. However when it gets to around $10k I will transfer to Vanguard index funds. We currently have all our tax deferred investments with Vanguard and are quite pleased with the very low fees.

What a great thread! Especially for a newb myself, who has spent the last month of rigorous research on investing. Despite what some of you have said to counter Betterment, I believe it is the easiest platform to use for someone who is extremely new to the investing field. I’ve recently turned 24-years old, and have come to the conclusion that I would need to save up for retirement. After reading MMM’s blog, I went ahead and created a Betterment account. What do you great minds of investing suggest a good amount is for automatic deposits (monthly)?

I’ve spent the last hour and a half reading this very interesting and informative blog but did’t see one post that alluded to my situation…a 73 year old mostly retired guy(my wife has a good job) with a $70K portfolio with Fidelity consisting of 70% dividend paying stocks, 20% bond mutual funds and 10% cash which has yielded about 11% return the last few years. I have come to the realization that I probably won’t live long enough to recover from the inevitable ’08 type debacle and am desperate to reallocate my portfolio to adjust to that possibility. I’ve been DIY all my life but feel now I could use some professional advice at a reasonable cost, thus my Betterment search which brought me to your blog. Any thoughts?

With regards to the VXUS…they are available as Investor or Admiral shares at Vanguard but I don’t see the dividend info on Vanguard’s or Nasdaq’s site? Forgive the newbie question (I just started investing in index funds 6 months ago) but do the mutual funds of VXUS (Investor or Admiral) pay the dividend rate as the ETF? I noticed that it has .14% expense cost vs the VTI Admiral fund which is .05% … generally I’ve been pouring my savings into the VTI fund because of the lower expense ratio but after reading your article I’m interested in understanding how the dividend would work on VXUS. Any direction would be much appreciated.

I like the sound of tax loss harvesting. I’m well into the 25% bracket and was considering putting $10k-$20k (under 10% of my portfolio) into Betterment. Does the tax loss harvesting complicate things a lot for tax purposes? I understand I’d likely (and hopefully!) be taking some short term losses. Am I just going to get a single 1099-DIV form from Betterment come tax season?

Using Betterment is a poor solution to not wanting to be bothered to learn the basics of investing, for obvious reasons– soon as the market swoons the noobs will be confused and panicked. Or in good times, ‘hey Apple just doubled, why don’t I have it in my portfolio? this sucks’ (already seeing this in the comments). Dependence and ignorance for the sake of getting started is a bad trade. Lessons 1 and 2 above are great, but they are not enough.

The ONE step you can take to get started with investing is to read William Bernstein’s “If You Can”. It’s super short, is intended to just tell you why you are doing this and what you absolutely need to know to make the project a success. From there, your choice to DIY at Vanguard or hire Betterment or whatever.

Indeed, Schwab’s Intelligent Portfolio service has an (unfortunately) sneaky way of making money. They require a minimum cash allocation, which they turn around and “sweep” into their own investments, under the pretense of portfolio stability. It’s not exactly a fee, so they can get away with saying no fee. That small (6% or more) cash allocation causes about the same drag over time as fees higher than Betterment’s.

Lameness from Schwab. Sure, the boomers may buy into it, but us millenials are all for transparency and they’ve failed there. Not a good long-term play. Oh, and I already have a cash allocation — it’s called my checking account, which is a Schwab bank account.

I’m a happy Betterment customer so I figured I’d jump in to respond to some comments here.

Betterment compared with just doing it yourself: I have my account set to automatically deposit a chunk of money into Betterment after every paycheck (twice a month). Since a Betterment account is invested in at least 10 different ETFs, to me it seems like a big hassle to have to make all those purchases twice a month in a way that your target allocation is right on point. If you don’t mind doing it, great! For me, $12.50 a month doesn’t seem like a big cost to not have to deal with it. I won’t even get into the complexity of trying to do tax loss harvesting yourself. And as for rebalancing, Betterment rebalances automatically whenever your drift hits 5%, which strikes me as a better system than just checking once a year or once a quarter or something like that.

Betterment compared with Vanguard: Vanguard is certainly cheaper, and that’s great. But there are several actual differences. For one, a Vanguard target date fund has 4 ETFs: US and foreign equities and US and foreign bonds. Betterment has 10 ETFs, including municipal bonds for taxable accounts and stock ETFs that have a value tilt (like VTV and VOE). For me, this was a big factor in choosing Betterment over rivals like Wealthfront, since I’ve been persuaded by the research on the benefits of value investing. Also, it bears repeating that Vanguard target date funds don’t have tax loss harvesting. In the month of January alone, tax loss harvesting saved me more money than Betterment costs me in a year.

Betterment compared to doing it yourself: I can have my account setup to automatically deposit a chunk of money into Vanguard after every paycheck (twice a month). The money automatically goes into each fund in exactly the 54/26/20 proportions it needs to. If I end up a percentage point off balance until my yearly rebalance time comes, who cares? My total fee is 0.07% (that’s 7 one-hundredths of a percentage point), compared to the Betterment account’s 0.41% total fee, and research shows that being off balance a bit makes no difference. In Vanguard’s long-term study, returns actually *increased* the less often you rebalanced.

Paying an extra percentage fee on your portfolio for something that has no defined benefit, doesn’t seem like a good investment decision.

Betterment compared to Vanguard LifeStrategy: Vanguard can also automatically deposit money into a LifeStrategy fund, which is more diverse (despite the 4 funds to 10 ETFs comparison), less than half the cost, and rebalances daily.

Unfortunately, if this year is like all the other years those ETFs have been around, you will likely see no more tax loss harvesting on that same invested money. After a few years more, the extra expense ratio will be much more than $12.50 a month, and you will likely never recoup that money in tax loss harvesting.

I find a value tilt to be utter crap, meant to sell people who don’t know any better on a more expensive fund that “beats the market”. I wouldn’t put my money there if there were no added expense ratio, I’m definitely not paying for that. Paying extra for a value tilt is utter crap. Fama himself says it’s reasonable to expect the market to adjust:

EFF/KRF (Fama & French): The premise is that until the last couple of decades, individual investors had limited access to diversified portfolios of small stocks and value stocks. As a result, the prices of small and value stocks were lower than they would be if all investors had easy access, and their expected returns were higher. The introduction and growth of mutual funds that invest in small-cap and value stocks would then reduce the expected returns on these securities. Since expected security returns depend on supply and demand, an increase in the average allocation to small and value stocks will reduce the size and value premiums.

Another prominent skeptic regarding the importance of a value tilt is John C. Bogle, as articulated in a 2002 speech and paper, The Telltale Chart.

supports Mr.Bogle’s conclusion regarding Value stock performance in actual mutual funds over time, and provides a possible reason. It seems to imply that when actual mutual-funds (index or otherwise) are implemented, that the most illiquid stocks are often excluded, removing the Value Premium.

“…We suggest these results might go a long way in explaining why market-based growth fund returns generally equal those of their value fund counterparts over time…”

I appreciate the thoughtful response. I don’t quite get your comment on tax loss harvesting. You say that I “will likely see no more tax loss harvesting on that same invested money.” I assume you mean that for those particular lots of securities, it’s unlikely that the price will drop back below my new cost basis (as lowered by a harvested loss). This is certainly true, but it’s really not an issue if you’re making contributions to your account, or even reinvesting dividends. Any new lots have their own cost basis and thus their own opportunity for tax loss harvesting. Betterment discusses this very issue in its extensive white paper on TLH, and agrees with you that there is less benefit for someone who doesn’t contribute to their account or reinvest dividends. Since I make monthly contributions, it’s not really an issue for me.

As for the value tilt, I’m not up to dissecting Fama and French, but if you look at the performance of VOE and RPV (two ETFs with a value tilt) vs the S&P you’ll see that it can in fact work in practice. I’m not saying it’s a magic bullet or anything, but I do think there’s something to it.

In terms of taxes, new investments are seen almost as separate accounts. Tax lots. If you have $1,000,000 invested, and throw in another $10,000, sure that $10,000 might have some tax loss harvesting done that nets you a few hundred bucks back on your taxes, but the 0.31% fee on the $1,000,000 will cost you $3,100. If you’re withdrawing $40,000 to live (using the 4% rule), that fee will represent 7.75% of your total yearly expenses.

It is inevitable that you will someday reach this point, for the simple reason that the fees are both *percentage based* (so they get higher as your account grows), and *forever* (each and every year, for the rest of your life), while the tax loss harvesting benefit is *temporary* (only really benefits new deposits, you’ll have to stop depositing eventually).

I took a look at VOE, and don’t see how it’s beating the market. VOE is Vanguard’s mid-cap value fund, so I can’t accuse you of cherry picking the one good fund out of thousands of bad. But I’m guessing you simply compared it to the market as a whole, looked at it, and said “See! Value tilting beats the market!”. This would be an invalid comparison. Let’s compare Vanguard’s mid-cap Value fund, to Vanguard’s mid-cap Index fund:

It’s more volatile, with a lower low during the 2008-2009 crash, and it has underperformed the index fund for almost the enterety of its existence. Based on the marketing you’ve seen for value tilting, is this what you were expecting?

Now let’s look at RPV. Definitely reeks of cherry picking, let me guess, you probably saw a chart like this

During the 2008-2009 crash, it feel to 25%. Imagine you had $900,000 invested, and were eagerly waiting to hit $1,000,000 so you could retire early…and suddenly you look at your account and see only $225,000 is left. That’s the ride this fund would’ve taken you on. For the majority of the time this fund has been around, it has underperformed the S&P500. I suspect this fund would’ve been cancelled, just like many other value funds which tried to beat the market over the years, had it not been for its recent performance.

This is in-line with John Bogle’s assertion. All the evidence I’ve seen says that value funds underperform. You can’t simply point to two funds (half of which are actually underperforming), which are doing well, when the vast majority of value funds aren’t, to prove that value funds can beat the market. Looking at the wild swings in that RPV chart, sure they “can” beat the market over a short period of time if you’re lucky and choose the right fund, but that’s no different than buying Tesla because you heard it’s up lately.

If one or two from of the group succeed for any short time period (like the time periods shown in the graphs above), I wouldn’t consider that enough validation to throw my entire life’s savings at such a strategy.

So comparing this to the S&P 500, a Large Blend fund, doesn’t make sense. This is another trick the salesmen (sorry, Financial Advisors) will use to make their pitch. Give it a valid comparison, Vanguard’s Mid Cap index fund, and you’ll see the effects of adding “Value” to the mix:

Reading most of these comments gives me a headache so here’s my endorsement from a “newb” who needs it really simple…. Thanks MMM for checking into Betterment and telling us about it. I didn’t know they invested in Vanguard funds and I was wondering if I was missing something by not investing with Vanguard. We have only started with IRA’s in the last two years and were getting killed with fees. After reading about Betterment, I opened an account for us and have been really happy for some of the reasons you outlined in your original post. Education (we need it!), visual representations of what’s happening in an easily digestible format, and ease of use. We do have automatic monthly investing set up at $100 to minimize fees and I found out that if something happens, you can move the date of the automatic investment anytime, meaning you can reschedule it out farther. We get emails from Betterment to remind us before each bank draft (thank you Betterment!) Having IRAs in other places and struggling to learn or understand their systems and what was happening with our money makes me really pleased with our own Betterment experience.

For Betterment, Sept 2013 – Oct 3, 2014 with a withdraw on that date. I received 2.8 % return, as per their site performance calculation.
During that year I moved a few times between 50/50 portfolio and an 80/20 for a year. So I defiantly did something wrong.
It was about 20K in total, but I think I started small, then ramped up, and then settled in with a weekly addition of 40-60 dollars. I figure I’d do that dollar cost average deal and try out their tools.

But certainly, timing could have been a big factor.

I also have a vanguard account (IRA) with everything in a 2045 target date retirement fund.
for a similar time period:

No money was added by me in this time period to the Vanguard account (STUPID ME!)

the difference is 4,677.87 or about 16.41 % (return)

Not sure what the fees are, but betterment invest in funds with fees, plus adds their fees on top.

I must have done something wrong. But still 13% difference, I went back to put it all in Vanguard. Saved the betterment fees too.

– So check it out, one fund with all the diversification done for you. More than 6 years with that IRA and it’s been very VERY good. YTD its 4.81 as of 5/1. And the 5 year is 11.12% which you’re not going to make 1200 bucks into 1 million over 3 years. But as far as set it an forget it goes. It might be a good option.

Good Luck with the IRA. and keep reading MMM, as it is all about solid advice. NO BS and no Sales of any kind. He even points out pros and cons and some mistakes. Awesome and good reading.

Hi MMM,
Great post! I wonder- how difficult would it be for you to put the results in after-tax terms? Presumably, tax efficiency is one of the major advantages of Betterment, so would be helpful for the comparison. Would this be too difficult?

Good idea David.. but it probably wouldn’t be practical from my side. First of all, everyone has different tax situations. Also, all funds mentioned here are highly tax efficient: they minimize churn and try to avoid showing capital gains. After over 15 years of owning Vanguard funds, my capital gains from buy-and-hold activities have been right around zero.

Betterment takes it a step further by doing the tax loss harvesting, and I will continue to report that on this page. Then you can manually plug that in to determine how much it would help with taxes.

I think all you’d have to do is keep track of the cost basis, and then report things as if you realized all capital gains today and paid a 15% cap gains tax.

The assumption of 15% is slightly biased against Betterment, since for some people the cap gains rate is higher. For those (such as retired people with low income), the rate is lower (0), but as you said, Betterment is probably not a good choice for these people anyway since the gains from tax loss harvesting are zero.

Did I miss anything?

Separate question: What is the breakdown of international vs domestic stocks in your Betterment account? If your Betterment account is 45% domestic, 45% international, and 10% bonds, then presumably having a line representing 45% VTI, 45% VXUS, and 10% BND is the appropriate comparison to the Betterment portfolio?

Sorry for being a nudge- I really like what you’re doing, just wanna make sure it’s done 100% right :)

Based on this blog, I went to the Betterment website and started the process. Somehow, I managed to fund my new account with $300k from my checking account. True, I linked the two, but nowhere did I authorize a transfer! When I called Betterment, they assured me the transfer would be null and void once it became obvious that I did not have $300k in that particular (or any) bank account. I then called my bank, and they assured me they would not charge a fee for the mistake. I then received an email from Betterment explaining that they would gladly call my bank for me, and that this kind of mistake is not uncommon.

Just a little tidbit for those idiots like me who don’t even realize they’re moving around large chunks of “real” money!

Any tip for easy investing when you are a non US resident and have to file a W-8BEN for tax withholding ? Being French, my withholding are 15% on dividends , no taxes on capital gains or interests…
I have a TD ameritrade account. I am pretty sur Betterment will not do the W8Ben thing ! Although I wish they would …
I have 20% of my money still in $ in the US the rest is in Euros in France. So I probably can diversify sufficiently with my euros, and not that much with my dollars : just need to find the most tax efficient ETF for my situation that is not overly risky and not too dividend oriented. Any suggestion would be really appreciated … I am really new at this

Betterment require you to be US Tax Resident though you can probably open an account with a US address and so on. They almost seem to be saying that in their requirements for a “US Address”. But definitely they would require a SSN and an ITIN (US tax number). But complicating your situation by doing something that it is not intended for is just complication you don’t need.
For other US investments, if you are US Citizen you may be able to benefit from the US/France tax treaty which exempts US passive investment earnings in some cases.
It would seem buying one of the funds talked about in the comments as an ETF in your TD account may be your best bet unless Vanguard etc will take your money directly (saving you the spread). I think US ETFs may be required to distribute capital gains each year, but think of that as a question to ask, not an answer.

I’m in my mid-20’s and currently make about $46,000/year. Each month, I invest 5% (that my company matches) into a 401k and I also buy company stock through my employee stock purchase plan. I am new to the investing game and am willing to invest in Vanguard (or Betterment). Which would make the most sense for me?

Depending on your 401k plan, that might be a good place to start. It’s easy and you don’t have to do hardly any work to increase your contributions. This can be nice because you never see the money hit your checking account so you won’t be tempted to spend the money. My only caveat would be to check the fees that your 401k plan charges.

Beyond your 401k plan, consider opening an IRA with Vanguard or Betterment. I personally prefer Vanguard for tax-advantaged accounts (IRA) because of their super-low fees. Betterment seems better suited for money that you are investing after-tax because they can do fancy tax-loss harvesting that can save you some money at tax time. However, I like Betterment, and if you find that using them would get you excited about investing, then by all means use them for your IRA too.

For basic solid investment advice, do a google search for “Bogleheads investment philosophy”. That should help give you a solid foundation for starting out.

My advice is to open an account with Vanguard or Fidelity, and invest (using direct deposit and automatic investment) in a low cost index fund or a few different funds(s). Which funds? What allocation to use?

Pick an allocation, buy a few super low cost funds (one for US stocks, one for global stocks, one for bonds), set up your direct deposit and automatically buy-into the funds you choose…then get on with the enjoying the rest of your life.

Check in once a year…and commit to staying invested for the long term, and you’ll be happy.

For instance: I use Fidelity, have an 80/15/5 mix of stocks and bonds and cash and invest in 3 different classes of funds (US Total Market Fund, International Developed Market Fund, Intermediate Term Bond Fund). They are all Fidelity “Spartan” Advantage Class with super low expenses.

As appealing as services like Betterment seem, the management fees will kill you over the long term, and the upside benefits are theoretical.

I know Betterment talks about Tax-loss-harvesting and superior risk/return based on their analytical approach, I just don’t see the benefit over the long term vs just buying and holding (with annual rebalance).

Your greatest wealth building asset is your INCOME. So automate your investing, live simply (while spending on things that REALLY MAKE YOU HAPPY) and then get back to WORK :)

My 401(k) is provided by T. Rowe Price and is currently in a Target Date Retirement Fund for the year 2050 (when I will be 63). The expense ratio for this fund is 0.58%. Should I move to a different/cheaper fund? Other investment options offered are:

It is cheap, you can download it instantly on your Kindle (or computer) and has very very good and simple advice for how to build your own balanced portfolio using low cost funds from either: Fidelity, Vanguard or T.Rowe Price.

For example, my combined expense ratio using Fidelity Spartan Funds is .06% for a 85% Stock (I forget my allocation of US vs international offhand, but I have global developed market exposure) and 15% Bond Portfolio (intermediate term US gov’t bonds).

If you want to add some Emerging Markets, a broader bond mix (to include TIPS and Corp Bonds) and some REITs….then perhaps you will have something closer to .15-20% expenses…but .58% is a ton.

Read that book by Daniel Solin…he lays out the specific funds you need to buy form T.Rowe in there.

I’m going to slightly disagree with Ravi on the fees. While the 0.58% fee is not great, it is actually below the industry average of 0.66%. So it’s not bad but you can certainly do better. See this url for Vanguard’s fees and their claim to the industry average:

Since you’re targeting 2050 I would suggest a 90/10 split between stocks/bonds.
But you are stuck with the funds you can choose from in your 401k. Unfortunately I don’t see a Vanguard Total Market fund, but the TRP Equity fund is pretty close.

But honestly, research has shown that the precise allocations don’t matter all that much. What matters is you pick an allocation and stick with it and rebalance occasionally. So maybe something easy to remember would be better for you:

Yes similar low-fee index funds. But with an IRA you will have more choice on where you open your account. Vanguard has the lowest fees. They also have Target Retirement funds that allocate the funds for you in a single low-fee fund. So you could do your Roth all in a Vanguard Target Retirement 2050 for simplicity. Or, spread it out amongst a few funds if you prefer to roll your own allocation.

JeffMarch 31, 2015, 7:41 am

Definitely keep investing in your 401k enough to get the maximum company match. This is free money. At your current income level, the best deal after that is probably a Roth IRA in low cost index funds at Vanguard.

I recommend you add a virtual target date fund to the analysis. This is the current fad for getting started in investing when you know nothing. These funds also diversify across 10 or so funds and rebalance. They adjust to more bonds over time. My “over the fence” view is they do not do as well as a build your own asset allocation that is well constructed. I have not owned any.

Really enjoyed this article! I’m someone who often likes to spend more than I should – but have no debt. I have virtually no savings, however, as a lot of money has been pushed into a business I started with 2 partners 13 years. We’re in the process of finishing up an acquisition of our company by another. I’ll probably get 2mm immediately, 3mm in 2 years, and up to another 6 mm in 4 year (although realistically I think the last payment will end up being a bit less.

Since I know little about investing – and don’t have the time (at least right now) to manage it, I had been looking at Betterment. After reading this article, I’m wondering if just going to vanguard directly would make more sense.

It sounds like you’re in a situation where you can do no wrong – you could almost put that sum of money in a checking account and live off it forever. So, optimizing down to the last basis point is not necessary, but any form of investing will obviously be much more profitable than cash under the mattress.

So it all depends on which option you feel best about. I am still happy with Betterment because I feel the tax loss harvesting pays for the service and their allocation/rebalancing aligns well with my best guess at a fairly optimal future performance. But I’m also very happy with my older, highly-appreciated taxable account still sitting in Vanguard. I wouldn’t want to move these funds over because it would mean claiming a large capital gain.

Thanks for looking into betterment. I’m in my mid 20s and very new to the trading world. Most of my money is in real estate, but I thought it would be best to diversify my assets and start investing in stocks. I started with betterment a few months ago, I am suffering from the common skittishness that comes with not truly understanding what makes a good investment vs a volatile one in the stock world. And just about every blog I read has multiple strategies, so it’s very difficult to weed out which ones will work best for me. I have a savings of 40 k. Clearly It’s not doing me any good in the savings account and I don’t have a mortgage payment so I feel 20 k in savings should be fine for emergencies. I noted that you have invested 100k. I would be investing 20k to start and then continue to invest 100 a month. Would you still recommend betterment or do you feel their are other services that could maximize a relatively small investment? Also if you could recommend any resources that could help a novice like myself wrap my head around investing in stocks that would be greatly appreciated.

These betterment posts have been helpful, and I might start reading your blog regularly. I have absolutely no head for investing, and I wanted a saving option that wasn’t just me sticking an extra 20 bucks in a do nothing savings account every paycheck. I just opened a betterment account, it does seem the best option, especially for someone like me who doesn’t have a lot of starting capital, has just about no idea what they’re doing, and doesn’t want to risk too much. Thanks for your help!

Hi Deirdre – Don’t forget about retirement accounts (401k, IRA, etc). Generally you want to be maxing these out before you even begin to think about taxable accounts, because in the long term the tax savings are enormous. Especially if your employer matches 401k contributions.

Sorry if this is obvious advice, but I’ll often see comments from people along the lines of “I’m new to investing – which stocks should I buy?” who haven’t yet taken advantage of retirement accounts.

Nothing at all against Betterment, but if you’re really new to this stuff it’s probably not where you want to be starting out. If you don’t have a 401k at work a basic Vanguard IRA would be a great place to start (many of us like to invest in their VTSAX fund).

Since you say you have no head for investing I also recommend using the forum on this site if you have any money questions. The whole investing world is insanely complex, but all you really need to know is a tiny fraction of it (half of which I’ve already covered).

I do already have a 401k (actually a 4013b if we’re being technical) and I’m contributing at the max amount, and my employer is matching my contributions. Betterment appeals to me because I am a beginner, I don’t have much to invest right now, and there seems to be fairly small amount of risk depending on how much I plan on investing. The same could be said of Vanguard, but for whatever reason, be it bells or whistles or what have you, Betterment’s service appeals to me more.

Hey Mustachians! I wonder… has anyone compared the performance of VTI to VT? My understanding is that VT holds a broader portfolio than found in VTI, with a more diverse collection of stocks in emerging markets. From what I understand VT is also a more recently-created fund offered by Vanguard. I like the look of VT but its fee is 0.17% whereas VTI offer a lower fee at 0.05%.

Does anyone have direct experience comparing the two? Or am I perhaps best off owning both? Thanks!

Hi All, I’m new to MMM and have a questions about Betterment. I’ve written them about the expense ratio fees and asked if I would be charged a fee by each fund every time I deposited money into my account. They wrote me back but I’m not sure I understand their answer. Any clarity from MMM would be much appreciated. Thank you!

“Hello Chris,

To be clear, the expense ratios are not paid when depositing and there are no fees paid when depositing. The only time fees are assessed from Betterment are at the end of each quarter when Betterment is assessing it’s advisory fee. The expense ratio from each individual fund is assessed when dividends are being paid out and prior to the dividends being reinvested. The advisory fee and the expense ratio from each fund’s fees are mutually exclusive.

Again, there are never fees assessed when depositing funds and the expense ratio from each fund only will be assessed prior to dividends being reinvested.”

Betterment vs. WiseBanyan – An email to Jon Stein, CEO and Founder of Betterment. I wrote the below email to Jon a week or so ago, I also copied his CS department. Jon and I had exchanged a few emails when I was considering his company. Since then I’ve put some of my money there. But also since then I’ve learned a few things about WB from some of you on MMM. In the email to Jon below I asked him to consider a few advantages that WB seems to offer, primarily additional insurance provided by a 3rd party and a lower cost fee tier for larger investors. I have not heard back from him. If anyone in MMM land has heard anything or expressed similar concerns please share any info you might have. Thanks so much!

“Jon,

Since we last corresponded I’ve deposited 93K into my Betterment account. I also transferred an additional 19k from my wife’s Roth. As a soon to be household acct we will have 113K with Betterment to take advantage of the Best tier. However, since moving all this over to BM I’ve started to hear more and more about Wise Banyan, and some of what I’ve learned thus far is appealing – particularly the difference of paying BM .31% all in, to WB’s .16% or so all in. While the additional services that WB doesn’t offer (yet) is a disadvantage, and while the total fees don’t amount to much with just 113K invested, what concerns me is when I have a few million invested with Betterment vs. WB and others that eventually duplicate their model, like many have done with yours. This link to an expense ratio calculator compares two expense ratios – .16 vs. .31, and like your email to me below highlighting the difference of all-in costs of 1% vs. .31% (enough to buy a small house over 30 years), this link illustrates the same scenario given what I would pay in fees with WB vs. Betterment over a 35 year span (obviously 50% less given the fee percentages).

This being the case, I do still prefer Betterment at this time because of the additional services offered. However, when I consider the overall cost to my portfolio as it grows to over a million dollars (I’m considering a few large deposits) the total fees to manage my money, let’s say at a million dollars, will be $2900 with Betterment vs. $1100 with WB. If I consider that I’ll have several million invested over 10 plus years the savings with WB are substantial.

Thus my two suggestions are these, a lower tier fee for million dollar plus investments, or even 500k plus investments, and additional insurance offered by a 3rd party, which is something WB currently offers through Foliofn/Lloyd’s London.

As I learn more and more about investing and what my options are I’ve come to realize a few things; my returns have been squandered by “traditional” fees and commissions, there are better options thanks to you, but also there my be even better and safer options for folks like me who will may have millions to invest.

I’ve been reading MMM off and on for a while now and I’m really enjoying this thread and it’s motivated me to finally look up the many different places that I have my money invested and at the fees that are eating away at my accounts. Currently, I have the following 401(k) and 403(b) accounts:

I made a switch from corporate to non-profit and work for a University now and max out the 403(b) and pension plans right now. My question is this:

Given that I have nearly $76K in 401k and 403b combinations that are in funds with relatively high expense ratios, what is my best strategy at this point? Should I try to move the $$ into an IRA? Or a Roth IRA? I’m still currently working and make about $88K per year so I think moving them to a Roth IRA will have pretty big tax implications, right? Ideally, I would love to move these to low cost Vanguard funds.

I have no cc debt, have a mortgage, and have about $80K in a savings account that I am also looking to move into Betterment/Vanguard. In fact, that’s why I was reading this thread initially and then realized that I needed to look into the expense ratios of my many retirement plans after reading all the comments :)

Any and all help would be much appreciated. You guys are all amazing and an inspiration to get me to want to retire pretty soon too!

“Given that I have nearly $76K in 401k and 403b combinations that are in funds with relatively high expense ratios, what is my best strategy at this point?”

You can consolidate old ex-employer retirement accounts to your current employer’s retirement account without taxes by doing a rollover.

“Should I try to move the $$ into an IRA?”

For old accounts, yes you can rollover to IRAs as well. If they are tax-deferred accounts (most are) then you can rollover to a “traditional” tax-deferred IRA account without tax problems as long as you do a DIRECT ROLLOVER. Do NOT touch the money, your 401k should mail the check DIRECTLY to your IRA broker. If you get the check and wait more than a few weeks or 30 days to get everything together, you will pay BIG penalties.

“Or a Roth IRA? ”

Unless you have a special ROTH 401k, this will cost you tax money. Not recommended without visiting your very special CPA.

“Ideally, I would love to move these to low cost Vanguard funds.”

Yes most online discount brokers will let you invest in Vanguard funds and ETFs for little or NO fees at all. I recommend TD Ameritrade, they will pay you to transfer accounts to them.

I agree with everything Dōitashimashite says except where to buy your Vanguard funds. I buy my Vanguard funds directly from Vanguard.com. Oftentimes brokers will charge to buy or sell mutual funds and I don’t trust brokers that pay you to transfer money to them (where does that money come from? probably existing customers).

“TD Ameritrade features more than 100 commission-free, non-proprietary ETFs. To trade commission-free ETFs you must be enrolled in the program. ETFs eligible for commission-free trading must be held at least 30 days. If you sell an eligible ETF within the 30-day hold period, a short-term trading fee will apply.”

Vanguard does charge some fees. “No account service fees if you sign up to receive your account documents electronically, or if you’re a Voyager, Voyager Select, Flagship, or Flagship Select Services client. If none of these apply, a $20 fee will be charged annually.”

TD Ameritrade has no charge for electronic documents as well, and paper statements are free if your balance is over $10k.

Vanguard does have a minimum balance. "When you open your Vanguard Brokerage Account, you'll initially need to add at least $3,000 to your settlement fund."

TD Ameritrade does not. "What is the minimum amount required to open an account? There is no minimum to open an account; however, a $2,000 deposit is required to be considered for margin and options privileges, regardless of any promotional offer. "

Lastly, yes, the money comes from their business profits. TD Ameritrade is a for-profit company. I have no problem taking some of that for myself, just as I have no problem using coupons or discounts at other businesses. They all hope you will spend more while you are there. But we have self-control, so we don't.

MMM – I’m fairly sure that $327 of your short-term capital loss for 2014 is disallowed as a “wash” sale (your form indicates a “W” in box 1f). This means that your basis was reset by adding the loss to the cost basis of your holding, but you won’t yet be able to deduct the loss on your 2014 tax return. http://www.investopedia.com/terms/w/washsalerule.asp

Wow, great catch!! I missed that… You would think Betterment being automated would avoid that. So in fact MMM may only really have got $14.60 in deductible losses for 2014, yet paid $20 for the service?

Seeing how the second line shows a purchase on 11/18/2014, Betterment should have just waited until 12/19/2014 to sell, but it sold at 12/9/2014, just *ten days* too early. Weird. Does not Betterment itself choose these sell dates? I wonder what it reinvested into, VWO or something similar.

MMM, seeing as you have probably done your taxes by now, did you only get the $14.60 in tax losses? How much of your 2015 tax losses were wash sales so far?

Box 1g shows only $0.74 of the wash sale–indicated in box 1f–as being disallowed, so the rest of that amount should still be a valid tax loss harvest!

From the IRS:

“Box 1f. Shows W for wash sale, C for collectibles, or D for market
discount.
Box 1g. Shows the amount of nondeductible loss in a wash sale
transaction or the amount of accrued market discount. When the sale of a
debt instrument is a wash sale and has accrued market discount, code
“W” will be in box 1f and the amount of the wash sale loss disallowed will
be in box 1g. For details on wash sales and market discount, see Schedule
D (Form 1040) instructions and Pub. 550.”

So is this beneficial to someone who is looking to just save? I am not as money savvy of those who have posted previously. (smile) My annual salary is a little less that 50,000. My saving was depleted due to medical issues. So I am now looking for ways to save and to grow that savings. A friend of mine sent me your way (he is a Fan).

I have been reading this blog off and on for the past couple of months. My wife and I are in our mid 20’s and I have been looking into starting retirement funds for the both of us. After reading this blog and doing my own research I get wrapped up in the back and forth comparisons between accounts with Betterment vs Wealthfront vs Vanguard etc. These comparisons have held me back from opening any type of account. We have about 85k in savings and put away around $2500 a month to additional savings.

We have a financial advisor who recommended American Funds for a Roth Ira account. Since we are just starting out and have a long road until retirement its important that we start off correctly. I don’t want to get screwed with management fees that will add up over the next 40+ years. I would appreciate any help that could point us to a good start to a successful retirement.

American Funds have a 5.75% load which is $4887 on $85,000. Also the broker gets money from American Funds each year. Buy Fidelity or Vanguard ETFs at no load and lower yearly fees. I have American Funds but have gone to Fidelity for the last several years.

One thing to note, whichever of those three options you choose, your money will be at Vanguard. Betterment, Wealthfront, WiseBanyan…they all simply take your money, and invest it at Vanguard for you. Their entire product is literally a website-wrapper on top of Vanguard funds, and the fee they charge for this wrapper is many times higher than Vanguard’s fee to manage the funds themselves! Their marketing is really fascinating to me, I don’t understand how they convince people who already know about Vanguard to do this…

For me, I login, hit “LifeStrategy Growth”, put in how much I’d like to buy, and I’m done. It already has my bank account information pre-filled in, it’s literally a 15 second process. Do a lot of people really choose where invest their life savings based on how pretty the website interface is? People think the pretty boxes for 15 seconds are worth paying hundreds of thousands of dollars in extra fees over their lifetimes? ¯\_(ツ)_/¯

Wow, this comment just saved me a lot of money. Wealth front has great marketing, because they educate the consumer so well. I got sucked into their white paper and I was still considering going with them, until I found your comment.

They charge a premium once you have a decent amount of money with them, so I’m going to use their recommendations and go to the source (Vanguard or Schwab). Thanks for your perspective!

Hi Kyle –You are smart to focus on fees right from the start. You probably want to post your question in the Forum on ‘Investor Alley’ or ‘Ask a Mustachian’ — you’ll get great feedback. With that said, I say skip American Funds for sure. Keep it simple and just open a Vanguard account. My two cents. Good luck!

Thanks for all the input I appreciate the comments. What type of account would you recommend starting off with Vanguard? And is it self advised or aided accounts? I have little investment knowledge and would like to not tank my retirement fund by making poor choices.

Great job on the savings so far, keep that up. You just need to put it to work! Do you have an IRA? If not set one up and start contributing. If you qualify, you could be moving $5500/year. For 2 people that’s $11000 each year. Whether you use a traditional IRA or a Roth IRA depends partly on where you are in your career (and tax bracket). If you tax bracket is low, contribute to a Roth and take the tax hit now. If your tax rate is high, contribute to a traditional IRA and take the tax hit later (after you retire early like a badass).

Most accounts through Vanguard are “self-advised” or do-it-yourself. But they have people who can answer your questions.

As far as the investment is concerned, go for a Target Retirement 2055 fund because that will have an appropriately aggressive mix of stocks (90%) and bonds (10%) for your age.

Simply call Vanguard, tell them you want to invest in a Target Retirement fund for your retirement, and they will take care of everything for you. You won’t have to make any decisions, simply tell them your age. Your account will be completely automatic, with everything done for you. It can’t get any simpler.

If you’d like to take it a step further, you can take a little more control and decide the amount of risk yourself. You can easily do this with Vanguard’s LifeStrategy funds:

Make your decision of how much risk you’d like (80/20 is usually best for an early retiree), and Vanguard will take it from there. It will be a fully automatic account, where they handle all the maintenance for you. Nothing else for you to decide. Again, it couldn’t get any simpler.

If you’d really like to take control, you can invest directly into the same funds used in the Target Retirement and LifeStrategy options above, without letting them do it for you. This will require about 5-10 minutes of maintenance from you every 1-3 years. This will reduce your fees even further.

Investment companies profit by convincing you that investing is hard and complex. Don’t fall into that trap. Here’s a nice graphic showing how Vanguard being owned by YOU (the fund owners) aligns their interests with yours in a way that cannot be replicated by the other companies listed here…

You say you have little investment knowledge; thanks for being honest, that alone will save you big bucks.

The question is do you want to invest some time into learning more? Learning this as a hobby for me has seriously changed my life and has been more worthwhile that college, I do not joke.

If yes, how much time? A few hours? Then meet with your financial advisor and put a plan in place. More time than that, then read a book from your library. I started with the Motley Fool books, but I also recommend other quick reads like “The Little Book” series, especially Joel Greenblatt and Bogle’s books. If you have time for serious study, read “The Intelligent Investor” by the master Ben Graham.

If the answer is no, I don’t have time for this crap, then open an account at Vanguard. Use the website or call 800-414-8740. Keep it simple, simple. If you have more questions, you can email me at adamhargrove at yahoo

Last words: your investment choices are NOT as important as how much you save!!

While setting up a Roth IRA with Vanguard I chose to put 3k into Small-Cap Growth Index Fund and 2k into Target Retirement 2055 Fund in hopes to better diversify. Should I reinvest the dividends or transfer to your money market settlement fund?

Definitely reinvest the dividends. You aren’t going to be touching this money for a long while, so keep it all invested and working for you. This is how you see the magic of compound interest happen.
(Transferring it to the mm settlement fund means that it will just be sitting there in cash, earning next to nothing.)

What risk are you hoping to diversify away here? 100% of the stocks in the Small-Cap Growth Index Fund are already in your Target Retirement 2055 Fund.

If you admit to having “little investment knowledge” why are you playing around with Small-Cap Growth?

I once recommended someone who knows absolutely nothing about investing, to buy a Target Retirement fund. So they signed up for Vanguard and ended up putting 100% of their money into International Stocks (the riskiest fund on the list she was looking at), because “it’s cheaper!”

I know someone else who was recommended (not from me) to open a Betterment account, since they don’t know anything about investing. They looked into it, and ended up with an E-Trade account, with 100% of their money in Tesla, because “Elon Musk is going places!”

I don’t understand how people who admittedly don’t know anything about investing, end up with such wild investing strategies, when the simple solution specifically made for them is staring them in the face…but I don’t recommend going down that path. Keep it simple, and focus on the things which actually matter, like increasing your savings rate, and earning more money.

Reinvest. Keep that money working for you. And congratulations on taking that first step!

BTW, buying those 2 funds doesn’t actually increase your diversification because the Target Retirement fund already owns all the stocks in the small-cap growth index fund. The Target Retirement fund is about as diversified as it gets because it owns ALL stocks via the Total Stock Market Index Fund and the Total International Stock Index Fund. If it were me, I’d put it all into the Target Retirement Fund and keep it simple.

Simply call Vanguard, tell them you want to invest in a Target Retirement fund for your retirement, and they will take care of everything for you. You won’t have to make any decisions, simply tell them your age. Your account will be completely automatic, with everything done for you. It can’t get any simpler.

If you’d like to take it a step further, you can take a little more control and decide the amount of risk yourself. You can easily do this with Vanguard’s LifeStrategy funds:

Make your decision of how much risk you’d like (80/20 is usually best for an early retiree), and Vanguard will take it from there. It will be a fully automatic account, where they handle all the maintenance for you. Nothing else for you to decide. Again, it couldn’t get any simpler.

If you’d really like to take control, you can invest directly into the same funds used in the Target Retirement and LifeStrategy options above, without letting them do it for you. This will require about 5-10 minutes of maintenance from you every 1-3 years. This will reduce your fees even further.

Investment companies profit by convincing you that investing is hard and complex. Don’t fall into that trap. Here’s a nice graphic showing how Vanguard being owned by YOU (the fund owners) aligns their interests with yours in a way that cannot be replicated by the other companies listed here:

I don’t understand why there is so many funds. It looks to me that VTSMX and VTSAX should cover low and high minimums if you think the market is ok and maybe VBMFX and VBTLX if you are cautious about the market. Am I correct or am I missing something?

I have about $200K in 529 account (2% CD). My son is going to go to college in 9 years. With tuition growing like crazy, I wonder if I should transfer 2% CD into a Vanguard 529 account. Please share your recommendation. Thank you.

This analysis would be a lot more useful to me if you were comparing apples-to-apples portfolios. I’d like to see the allocations of the Vanguard funds in the exact proportion to Betterment’s allocation. Then you could just set the Vanguard to re-balance annually on the same date (which is a fairly common practice). This analysis would really pit Betterment’s TLH and Auto-reblance against Vanguard for you to evalutate if you are getting the extra 1% or 0.5% over 10 years, as stated in your original post. Comparing your Betterment account to VTI is certainly going to be much different over the years but it doesn’t really demonstrate that Betterment works or is worth it. Just my $0.02. Love the blog.

I have a question. My boyfriend and I each have separate accounts on betterment. We don’t have a ton of money but we have a nice chunk and we are not rich. Betterment has been falling recently. I’m down 25 he’s down 80. He is talking about wanting to pull his money.. but my thought is to wait. His has been up 100 before, my thought is it will continue to go up and down. He’s worried about losing more… What do you think we should do?

Sounds like time for a refresher course on what investing really is! You don’t sell when stocks are going down – this is the time you start getting excited about buying more. The bigger the drop, the more you get for your money. Every dollar of stocks you own will generate dividends and growth over your lifetime, which is the way you become wealthy.

Once you have an account value equal to about 25 times your annual spending, the dividends plus selling off a tiny fraction of the actual shares occasionally will be enough to pay for all your expenses – for life.

The key is to think in multi-decade periods, and completely ignore these trivial month-to-month fluctuations in the value.

When you say “down 25” and “down 80″…what units are you using? Dollars? Thousands of dollars? Percent?

Remember, you’re not investing in Betterment, Inc., where if investors lost confidence the stock could continue to drop and drop until the company is delisted and can’t get capital for operations and goes under. Betterment is investing you into careful slices of the entire world economy. Barring actual societal collapse, hang in there, it will eventually recover everything you’re “down”, and then some.

I could use some advice. I am 36 years old and I unexpectedly lost my husband last year. He was in finance and I was fortunate enough to be left with all our retirement accounts (around 190k) and a few life insurance policies (around 370k). I didn’t know what to do with the money and after meeting with several advisors and doing some research on my own, I decided to keep the retirement accounts at Fidelity and have them manage it at a cost of 1% a year wrap fee. This money is in a 70/30 portfolio using all Fidelity funds. For the rest of the money I went with a managed account through a financial advisor at my bank at a cost of 1.25% per year. 200k is in a conservative 20/80 portfolio (because I was afraid to be aggressive with all of it right away) and the other 170k is in a 80/20 growth portfolio. The money there is invested in a mix of mutual funds and ETF’s. All the money has only been invested for about 3 months but I’m realizing just how expensive these fees are and how much they will add up over the years. I also have about a 60k emergency fund in a money market at the bank. I am fortunate enough to have a good job making 80k a year so I hope to not have to touch any of the money until I retire in 20-25 years. We worked really hard to save money in our retirement accounts and I want to do the smartest thing with all of this money as a tribute to my husband. Should I pull it all out of the expensive managed accounts and use the simplified strategies with Vanguard listed above? If I do this, will there be any penalties to worry about? I would appreciate any wisdom that you could give me to fix this mess. I am brand new to investing.

I realize you’re probably looking for MMM but, you are absolutely right about those fees are going to seriously drain your returns over the years. Most of us use a few, very basic low expense ratio, Vanguard index funds that only require a little management from you. Vanguard also has funds that can require virtually zero maintenance from you. Betterment is a type of automated management, you would be looking at .15%(rather than your 1 or 1.25% for investing over $100k with Betterment. Whoever you invest with, realize that they all sell similar products. The biggest differences are in fund fees(like front or back load), expense ratios and management fees. $60k sounds like a rather large emergency fund there are likely better places to place an emergency fund as well.
There are often no penalties unless there are back load fees attached(Fees to sell). You’ll have to check out if you can move your retirement accounts but you can often move(rollover) penalty free as long as it goes to another retirement account. I recommend checking out the MMM Forum and asking more questions, people are really helpful there.

I’m sorry to hear about your loss. I read a bit on investing, but I still consider myself a newbie after reading off here. You’re handling a substantial amount of money. It would be smart to consider the perspectives of a lot of people commenting on this certain post. Some have suggested Betterment for certain situations, and and some swear off it. Most of them all have valid points.

Personally, I’m leaning more onto just going for Vanguard, because Betterment charges a very minute percentage on top of the expense ratio(from what I’ve read so far).

But I would suggest for you to read all the comments from the start of this post if you haven’t already. That would help you reach a better, and informed decision.

Very interesting discussion, thank you to all who contributed. I can’t ignore the longer term implications of the fee structures at Betterment. While there may be some benefits in TLH the first few years, over time the benefit will be dissolved by the % fee as the account balance grows.

This post helped me understand the fee game that Wealthfront (and Betterment) are playing:

Hey MMM, I wanted to recommend a link at the top of your website next to Home, Media and Contact to add Experiments next to it. Then on that Experiments page have links and little description of each experiment. I think they’re great and love watching the the progress but I have to search for them.

Hey, I found this place by looking up Betterment, and there is so much information here and so many helpful comments! I occasionally read articles regarding money, investing, and retirement accounts and whatnot, but I have yet to start actually investing.

I know that it’s best to start sooner rather than later, but my lack of knowledge in this area has stopped me from investing thus far. Betterment seemed like just the thing for me, and was going to get started, but after reading about all fees and learning the existence of Wisebanyan and whatnot, I am again paused on my road to investing. Furthermore, I have other questions that I hope someone would be able to answer.

Background info: I am 25, and I recently left my permanent job to pursue other opportunities, and as such, there are money decisions I will have to make. In my current position, I am making $80k a year, but it’s just a temporary position that is set to end in 2 months. I averaged $672 per month in expenditures in 2014 and I am averaging $693 per month this year- most of it is going to rent.

I participated in my previous company’s ESPP, and have around 20k sitting in the E*Trade account that was set up for it. I can choose to sell the shares or transfer them to a personal account, and will need to take action within 2 years. It does pay out dividends, which I have elected to reinvest. Should I just sell these shares now, or should I move them into another account?

I contributed towards the company’s 401k and have around 16k in the account which is 100% put towards Vanguards 2050 Retirement Fund. Should I leave it sitting it its current account, roll it over to an IRA, or wait until I am employed as a permanent employee and roll it over to the new 401k? The company’s investment plan site says that the funds were transferred upon my termination, but I don’t know to where; I’ll have to call the HR department about that.

Lastly, and the reason why I read this blog post, I keep a balance of $0 in my checking account and I have around 85k sitting in my savings account. I know that I should do something with it, and originally, I was going to get into investment properties at the advice of my parents, but now that I don’t have a predictable income, I’ll have to put that money to use another way. After reading the posts here, I have concluded that my top choices are: Betterment (0.25% fee), Wisebanyan, or a direct Vanguard account. I don’t plan on interacting with whatever account I open very often except for perhaps depositing more funds into the account. I am probably better off just opening an account and just funding it instead of fretting about which account and which index, but that’s just how I am, and that’s why it’s taken me this long to get my feet wet with it.

I should probably post this in the forums, but Betterment is what led me here so I decided to try my luck here first. Thanks for reading!

As for betterment. I had to jump out. I put an amount for a year and compared it to my vanguard 2045 target date fund. Betterment was so much lower over the same 1 year time period.

To tell you the truth. I think anything that is a few years will be hit or miss and over the long run 30 plus years it will be hard to beat the overall market (that’s because good companies come and go). So, for the set it and forget it, I think figuring out how much you wanna put away as a retirement fund (that’s your investment) and use the rest of the cash that you have on had to build up a “USE me NOW” fund. Go for housing, clothes, experiences, and invest in yourself.

So unless you’ve maxed out your retirement accounts, I don’t know if I would jump onto the Robo advisors.

You might want to check out the lending club experiment on this site as well. That’s an interesting alternative investment.

BUT, “I contributed towards the company’s 401k and have around 16k in the account which is 100% put towards Vanguards 2050 Retirement Fund”

This I would roll over into a Vanguard account. It’s easy to do and it will save you the 401k management fee (which you don’t get to see) for the same thing at Vanguard.
That’s a no-brainer that will save you between 1-2% a year (depending what the 401K management fee is).

Definitely don’t rush to move that money you have in savings. The market is “due for a correction” and it would suck to put that money in and see it go down 10-15%.

Unfortunately, I have a very poor grasp on how much I should keep as liquid (partly because I don’t invest in myself much) so I figure that 6 months’ worth of expenses should be around the minimum I should keep (at least $4200).

I haven’t started an IRA account, but I will, and will max it out when I do. I only contributed enough to get the employer match on my 401k in the past, but I’ll likely max out the contributions in a future job.

I’ve seen several people suggesting moving the 401k straight to Vanguard so I’ll do just that as soon as I can access my account- company split changed some things.

Thanks for the correction information. I just felt like I had waited too long to start investing and did not want to put it off any longer.

I guess the summary of my plan is now: Vanguard for 401k rollover and then Vanguard or WiseBanyan for RothIRA and investment account after the presumed correction.

LOL. First of all, 4200 for 6 months of expenses is Brilliant. Also, at 25 you’re pulling in 80K a year, plus 36K in some sort of investment accounts and 85K in savings. HOLLY BALANCE SHEET. That is a truly excellent, and super respectful way to handle your money. You should probably write a book right now.

Obviously its MMM style, and you might want to think about ways to lower your taxes. 1. since taxes are a huge hit 2. you’re likely overpaying in taxes relative to the benefits you receive. 3. you might disagree with how the money is spent by the government, so you might also want to minimize for that reason as well.

In this thread, I liked everything that “DODGE” has posted. Do scan this thread for all those golden nuggets.

But Frankly, you’re super young. 25 is actually the age that most people “START” to invest, and even start to invest for retirement. Now, I know you don’t want to be like most people. But let’s also be REAL and agree that when we invest in a 401K or IRA, we are (effectively) locking that money way (due to the high penalty of withdrawing early). Now, I hate bring this up, but some people don’t make it to retirement. So that is something to consider as well.

I think the summary is good. Also, maybe you want to try to set up a fake trading portfolio. And see what if feels like to see it move over the next few weeks. I think it will be great training.

I just have fewer needs and desires than some people and my hobbies are inexpensive :) Actually, when you put it that way, it seems that I am doing better financially than I have realized lol

Yes, it is in my interests to lower the amount of taxes I owe, and I wanted to open a RothIRA account before the previous tax year ended, but for better or worse, when it comes to making financial information, I like gathering information first and I don’t always act on it right away.

I’ve actually read every post on here in entirety with focus on Dodge, Moneycle, and Dōitashimashite which has led me to my current considerations~

At the very least, I’m glad I’m not as behind as I thought I was. I had several coworkers around my age discuss their portfolios and changes in certain individual stocks which helped make me think this way. I am very aware that the money is effectively locked away, and I’m okay with that. Also, I’ve already prepared a will for my assets as well as a living will, and have designated beneficiaries in my 401k in case something happens to me. They’ll be updated as I go through life.

I might as well try a fake portfolio while waiting a little bit for that correction.

Again, thank you for all your suggestions; you’ve helped me quite a bit, and I’m quite excited to get started now!

One thing thou, you mentioned: “my interests to lower the amount of taxes I owe, and I wanted to open a RothIRA account before the previous tax year ended”

the good proof of your ability to achieve that in the future.

A little more to think about, but again. You have time. ;)

So, if you’re like me, and live in NYC, and you PAY FEDERAL, STATE, and CITY tax. Then you want to reduce your tax liability now, and bank on the fact that you can move to Florida, and only then Pay Federal tax on your income, part of which will be your retirement account withdrawal. But I’ll argue that you can adjust this to minimize the taxes, yet the counter argument is that the unknown rate might still be higher than the current.

Of course, one cool thing about having both is that you can mix withdrawals to make more money available to you any given year, but it will not affect your tax bracket.

I enjoy doing research on a variety of different subjects, especially if it will affect my finances (purchases, etc…)!

Wow, that’s a lot of tax! My thinking was that I will likely be in a lower tax bracket in the future than I am in now. However, you bring up a very good point that I had not considered until now- higher/lower taxes based on where I’ll end up retiring.

Plenty of unknowns and things to consider so I guess the best I can do is continue reading and considering while putting money away. As I learn, I continue to find out how little I actually know. One step at a time, I guess!

This comment jumps out at me: “The company’s investment plan site says that the funds were transferred upon my termination, but I don’t know to where”. If you recently left a company and they sent you a check for your 401k balance then you NEED to deal with it NOW. You have 60 days to roll those funds over to an IRA (or another 401k) or you will be on the hook for income taxes and a 10% penalty on the “early” withdrawal.

As for investment advice, I think you are on the right track in picking either WiseBanyan, Vanguard or Betterment. IMHO, it’s better to invest in something with higher fees than to do nothing at all so get it invested somewhere. But of course avoiding higher fees is the best. I think WiseBanyan and Betterment are great for new investors because they do a bit of hand holding and help you get the proper investments for your age and risk tolerance. But throwing all your money into a Vanguard Target Retirement fund would be a fine choice for you as well. Just get started and have no regrets!

Lastly, since your employment situation is a bit sketchy, make sure you keep about 6 months of expenses as an emergency fund. Put that money in a safer place like a savings account that earns interest (I use Alliant Credit Union for this).

I totally agree Antonius, KittyCat has come really ahead of the game for such a young age. I’m turning 25 this year and my network is only about a third of KittyCat’s saving alone LOL

Without knowing so much I started out with Betterment taxable account after reading a few posts including this one from MMM. Not that I didn’t consider Vanguard, but I did not have enough for a minimum requirement to start with Vanguard and anyone can start a Betterment account even with $0 balance, which I think it’s a good thing for any young person who wants a safe start out and have a feel in this investing game for whatever amount they can afford.

Nevertheless, I didn’t contribute so much, total ~4K in 4 months. The account receives dividends plus market change went negative then positive, which I’m happy with. But at the same time I didn’t max out my 401K limit (18K). Per advice from many people from the forum and my own reading, I totally should max out my 401K (like the 1st priority) to enjoy the investing with free-tax money. To the concern of money being locked, there are methods to access to it early which many people have mentioned about. I also hate the idea of my money being locked; therefore, I as well had only contributed up to my employer’s match. But now I have a change of thought after knowing it’s possible to access money earlier without penalty.

I’m not sure about your situation now, but I hope you found a new job that you like with even better pay than 80K from last year, and with such a high pay you get with still a low spending, consider max-out the limit for the pre-tax investment is totally possible.

Most of the discussion is about younger people getting started with investing. As a 60 something couple in retirement with significant IRA balances that now support our lifestyle I wonder if this is a good way to invest to minimize fees. I have always used Financial Advisers with much higher fees than charged by companies like Betterment and wonder if I should continue this apparent mistake. In doing my own research it looks like the returns over the last year have been similar to what I could do with Betterment, or direct Vanguard investing, except that the fee paid to the adviser then comes out meaning I am behind. I don’t need advice on taxes or planning my retirement spending so the adviser is really just to direct investments. Finally I feel that I should always have at least one year of expenses in cash to fund my lifestyle in case the market goes down, yet I don’t see this as a strategy in the Betterment allocation. Any thoughts on this are appreciated.

The bad news is that you’ve probably already donated a significant percent of your portfolio to your financial advisors. A one percent fee over 30 years will deplete your portfolio by 26%! The math is pretty easy: (1.0 – extra fee)^years. So for a 1% fee over 30 years, (1.0 – 0.01)^30 = 0.74 which means your portfolios is 74% the size it would have been without that fee.

Betterment is great for starting out but the modest 0.3% fee doesn’t go away. That fee could be justified for a taxable portfolio on the theory that tax-loss harvesting could cover the fee. But for an IRA, I find it hard to justify. If it were me, I would move your money to Vanguard which is safe and has the lowest fees you can find. It should be fairly easy to replicate whatever mix of stocks and bonds you currently have.

I’m in my mid 20s and just learning about investing and saving. Recently opened up a betterment account with $1k + $100 auto-deposit a month. I’m in the 25% tax bracket and I just wanted to know if enabling tax-loss harvesting is right for me. I don’t completely understand if at this point if this would benefit me.

There is no such thing as tax loss harvesting in a Roth IRA. In a simple IRA I doubt you could move into the 15% bracket but you would have to take a look if you are within 5k of that and can commit that much to the traditional by tax time.

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